C.H. Robinson Worldwide, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. C.H. Robinson is a global transportation services and logistics provider. Results are unaudited; comparisons are with Q1 2018 unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $3.751 billion | $3.925 billion | Down 4.4% |
| Net revenue | $678.8 million | $625.9 million | Up 8.4% |
| Income from operations | $224.6 million | $191.6 million | Up 17.2% |
| Net income | $161.8 million | $142.3 million | Up 13.7% |
| Diluted EPS | $1.16 | $1.01 | Up 14.9% |
| Operating cash flow | $256.9 million | $200.6 million | Up 28.1% |
Transportation revenue declined 3.6% to $3.505 billion, reflecting lower pricing across most transportation services, particularly truckload and air. Sourcing revenue fell 14.4% to $246.3 million on lower pricing per case and lower case volume. Net revenue growth was driven principally by truckload margin improvement. Total net revenue margin increased to 18.1% from 15.9%; transportation margin rose to 18.6% from 16.4%. Operating expenses were $454.3 million, up 4.6%, but declined to 66.9% of net revenue from 69.4%. Income from operations as a share of net revenue increased to 33.1% from 30.6%.
Cash, debt, and liquidity
- Cash and cash equivalents were $445.5 million at March 31, 2019, versus $378.6 million at year-end. Working capital was approximately $1.30 billion, down from $1.32 billion.
- Total debt was $1.342 billion, compared with $1.346 billion at December 31, 2018. No revolving-credit borrowings remained outstanding. The company reported compliance with all debt covenants.
- Available capacity included a $1.0 billion revolving credit facility and a receivables securitization facility with capacity of up to $250 million; the latter was substantially drawn at $249.8 million. Management said available cash, expected operating cash flow, and credit facilities should cover anticipated needs for at least the next 12 months.
- Operating cash flow was $256.9 million. Investing activities used $58.0 million, including $44.1 million for the Space Cargo acquisition and $13.9 million in capital expenditures. Financing activities used $134.8 million, including $69.7 million in dividends and $67.6 million in share repurchases.
Material changes and notable items
- Despite lower reported revenue, net revenue increased 8.4%, supported by truckload margin expansion as the company shifted toward contractual volume in a falling-cost market. Truckload net revenue rose 14.4%; the average customer rate per mile, excluding estimated fuel effects, declined approximately 5.5%, while truckload transportation costs declined approximately 8.5%.
- NAST operating income increased to $211.3 million from $179.6 million. Global Forwarding operating income rose to $14.2 million from $8.2 million. All Other and Corporate reported an operating loss of $0.9 million, versus income of $3.7 million.
- Interest and other expense increased to $17.1 million from $10.7 million, primarily due to a $5.0 million unfavorable foreign-currency impact and higher variable interest rates. The effective tax rate was 22.0%, versus 21.3%.
- The February 2019 acquisition of Space Cargo, for $44.1 million net of cash acquired, expanded the company’s presence and capabilities in Spain and Colombia. Its results were included from March 1; purchase accounting remained preliminary, and $24.6 million of goodwill was recorded.
- Effective January 1, 2019, the company combined Robinson Fresh transportation operations with NAST and moved the remaining Robinson Fresh business into All Other and Corporate; prior-period segment data was reclassified. Adoption of lease accounting added right-of-use assets and lease liabilities of approximately $265.4 million and $273.3 million, respectively, at adoption, without material reported impact on earnings or cash flows.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management expects to continue using cash and debt facilities to fund working capital, capital expenditures, potential acquisitions, dividends, and repurchases, and states that liquidity is expected to be sufficient for at least 12 months. The company anticipates completing the sale of a Chicago property later in 2019; its carrying amount was approximately $11 million and estimated fair value was $18 million.
Management cited risks including economic and freight-market conditions, demand and pricing pressure, truck capacity and carrier relationships, competition, customer consolidation, acquisition integration, foreign operations and currency exposure, regulation, fuel prices, produce safety, cybersecurity, litigation and contingent auto liability, and changes to capital structure or LIBOR. Routine litigation was not expected to have a material effect, though reasonably possible additional losses could not be estimated for some matters. The company was under an IRS audit for tax year 2015 and reported $39.3 million of unrecognized tax benefits and related interest and penalties. Oracle cloud-based finance systems were implemented during Q1; related control processes require effectiveness testing during the remainder of 2019. Management reported disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether truckload margin gains persist as freight-market supply, demand, and pricing change.
- How lower transportation and sourcing revenue trends develop, including sourcing volume and pricing.
- Space Cargo integration, preliminary purchase accounting, and the contribution of acquisitions to Global Forwarding growth.
- Debt, securitization-facility utilization, covenant compliance, and the company’s ability to sustain dividends and repurchases.
- Potential outcomes of the IRS audit, unrecognized tax benefits, and routine legal and contingent auto-liability claims.
- Results of testing controls affected by the new Oracle systems implementation.