C. H. ROBINSON WORLDWIDE, INC. quarterly report, Q3 FY2018

C.H. Robinson Worldwide, Inc. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. C.H. Robinson is a global transportation and logistics provider, with North American Surface Transportation (NAST), Global Forwarding, Robinson Fresh, and All Other and Corporate segments.

Financial performance

Amounts below are in millions, except per-share data. “Net revenue” is the company’s non-GAAP measure: total revenue less purchased transportation and sourced-product costs.

• Q3 total revenue rose 13.4%, net revenue 16.9%, operating income 26.5%, and net income 47.6% year over year. Q3 net revenue margin was 16.2% versus 15.7%; operating income was 35.4% of net revenue versus 32.7%.
• For the first nine months, total revenue increased 14.5%, net revenue 14.7%, operating income 16.4%, and net income 35.5%. Net revenue margin was 15.9% in both periods; operating income as a share of net revenue improved to 33.0% from 32.5%.
• Q3 transportation revenue increased 17.3%, driven by pricing (including fuel) and volume growth in LTL and Global Forwarding. Sourcing revenue fell 24.9%; the new revenue standard reduced reported sourcing revenue and associated product costs without materially affecting operating income.
• NAST led Q3 operating-income growth: segment operating income increased to $204.2 million from $151.4 million. Global Forwarding operating income declined to $23.8 million from $31.1 million as expenses outpaced net-revenue growth. Robinson Fresh operating income rose to $21.4 million from $11.6 million, helped by lower expenses and stronger transportation net revenue.

Cash flow, liquidity and debt

• Nine-month operating cash flow was $528.9 million, up from $218.3 million, primarily reflecting higher earnings. Investing cash outflow was $52.5 million; financing cash outflow was $495.4 million.
• Cash was $297.8 million at September 30, 2018, down from $333.9 million at year-end 2017. Working capital was $1.3 billion, compared with $523.5 million at year-end; the company noted adoption of the revenue standard changed balance-sheet classifications.
• Total debt was $1.341 billion, compared with $1.465 billion at December 31, 2017. The balance included $500 million of older senior notes, $591.4 million of 2028 senior notes issued in April, and $249.9 million under the receivables securitization facility. No revolving-credit borrowings were outstanding at quarter-end.
• The company paid $195.2 million in dividends and repurchased $202.1 million of stock during the first nine months. It reported 14.76 million shares remaining under its repurchase authorization at September 30.
• Management said available cash, expected operating cash flow and borrowing capacity should be sufficient for working capital, capital expenditures and dividends for at least 12 months. On October 24, 2018, after quarter-end, the revolving facility was increased from $900 million to $1 billion and its maturity extended to October 2023.

Changes, outlook and risks

• The company adopted the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. Transportation revenue is now recognized over the shipment transit period rather than at delivery. Certain sourcing contracts are reported net as agent transactions, reducing both reported revenue and costs. Adoption increased nine-month operating income by $9.6 million and net income by $7.1 million versus the amounts that would have been reported without adoption; prior periods were not restated.
• Q3 effective tax rate fell to 26.5% from 35.2%; the nine-month rate fell to 24.7% from 34.2%. Lower rates reflect tax-law changes and share-based-payment tax effects, among other factors.
• Interest and other expense benefited from favorable currency revaluation of approximately $7 million in Q3 and $14.5 million for the nine-month period, partly offset by higher debt balances and interest rates.
• No specific earnings or revenue guidance is provided. Management cautions that results may be affected by economic and customer demand conditions, service pricing, fuel and carrier capacity costs, competition, employee retention, technology or cybersecurity failures, international operations, produce supply and food-safety risks, litigation, and acquisition integration.
• The filing reports routine litigation, including 15 contingent auto-liability cases; accrued amounts were not material, and management did not expect resolution to materially affect results. The company was in compliance with debt covenants. It was under IRS audit for tax year 2015 and reported $37.7 million of unrecognized tax benefits and related interest and penalties.
• Foreign-exchange sensitivity analysis estimated that a hypothetical 10% weakening of the U.S. dollar would reduce quarterly operating income by about $27 million; a 10% strengthening would increase it by about $22 million.

Important facts for investors to verify

• Whether transportation pricing and margins can hold as carrier costs, fuel prices, and capacity conditions change; nine-month transportation margin declined to 16.4% from 16.6%.
• Whether Global Forwarding can convert revenue and volume growth into improved operating income, and whether Robinson Fresh can stabilize sourcing volumes and profitability.
• How the revenue-recognition change affects period-to-period comparisons, especially reported sourcing revenue, contract assets, and transportation accruals.
• Debt maturities, the April 2019 securitization-facility expiry, covenant terms, and the effect of the post-quarter revolving-credit amendment.
• Cash deployment, including dividends and repurchases, and the sustainability of operating cash flow amid working-capital movements.