C. H. ROBINSON WORLDWIDE, INC. quarterly report, Q2 FY2017

Full document

C.H. Robinson Worldwide, Inc. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods. The unaudited filing was dated August 3, 2017. C.H. Robinson is a global third-party transportation and logistics provider, with sourcing of fresh produce, operating through NAST, Global Forwarding, Robinson Fresh, and All Other and Corporate.

Financial performance

  • Q2 revenue: Total revenue increased 12.4% to $3.710 billion. Transportation revenue rose 15.2% to $3.320 billion; sourcing revenue fell 6.7% to $390.0 million.
  • Q2 net revenue: Down 3.4% to $573.8 million. Transportation net revenue fell 3.2% to $538.6 million, and transportation net revenue margin contracted to 16.2% from 19.3%. Sourcing net revenue fell 6.8% to $35.1 million; its margin was 9.0%, unchanged.
  • Q2 profit: Operating income decreased 22.2% to $181.8 million; operating income was 31.7% of net revenue versus 39.3%. Net income fell 22.4% to $111.1 million. Diluted EPS was $0.78 versus $1.00. Effective tax rate was 35.6% versus 37.1%.
  • Six-month results: Total revenue increased 11.8% to $7.125 billion, while net revenue declined 1.3% to $1.142 billion. Operating income fell 14.5% to $369.8 million; net income declined 11.0% to $233.2 million, and diluted EPS was $1.65 versus $1.83. Transportation net revenue margin decreased to 16.8% from 19.5%; sourcing margin increased to 9.3% from 8.6%.
  • Cash flow: Operating cash flow was $150.0 million for the first half, down from $247.3 million. Investing used $35.8 million, including $33.0 million of capital expenditures; financing used $97.1 million. Cash increased by $25.5 million to $273.2 million. Management attributed lower operating cash flow primarily to working-capital growth as volumes, rates, and transportation costs, including fuel, increased.
  • Liquidity and debt: Working capital was $487.5 million at June 30, versus $162.4 million at year-end. Debt totaled $1.342 billion: $592 million outstanding on the $900 million revolving facility, $500 million of senior notes, and $250 million under the receivables securitization facility. Revolver availability was $308 million. The company reported compliance with debt covenants. Cash was $273.2 million, including $206.3 million held outside the U.S.
  • Shareholder returns: First-half cash dividends were $128.8 million; share repurchases were $70.5 million. The declared dividend was $0.45 per share for Q2, compared with $0.43 a year earlier. 3.53 million shares remained authorized for repurchase at quarter-end.

Material changes and operating drivers

  • Revenue growth did not translate into net-revenue or earnings growth: purchased transportation costs rose faster than customer pricing, compressing transportation margins. Management cited higher transportation costs, including fuel, across nearly all transportation services.
  • NAST Q2 net revenue declined 9.8% to $359.9 million and operating income fell 23.2% to $140.3 million. Truckload net revenue was down 14.1% despite approximately 8% volume growth; LTL net revenue rose 2.1%, while intermodal declined 6.3%.
  • Global Forwarding Q2 net revenue increased 24.5% to $121.0 million and operating income rose 23.6% to $27.7 million, primarily reflecting the APC Logistics acquisition. Ocean, air, and customs net revenues also grew.
  • Robinson Fresh Q2 net revenue declined 10.3% to $60.8 million and operating income fell 47.8% to $14.2 million, due to lower transportation and sourcing net revenue and higher claims, warehousing, and personnel costs.
  • APC, acquired in September 2016 for approximately $229.4 million, contributed to Global Forwarding growth and added employees and acquisition-related amortization. The company paid a further $1.8 million working-capital adjustment in the first half of 2017.

Outlook, risks, and notable items

  • The filing gives no specific earnings or revenue guidance. Management said available cash, expected operating cash flow, credit facilities, and market credit should be sufficient for foreseeable working-capital, capital-expenditure, and dividend needs. The company may use debt to fund working capital, capital expenditures, acquisitions, dividends, and repurchases.
  • Key risks cited include economic and freight-demand changes; pricing and competition; truck capacity and carrier relationships; customer consolidation; integration of acquisitions; litigation and auto-liability claims; international and regulatory risks; produce safety or contamination; fuel changes; and cybersecurity risks.
  • ASU 2016-09 adoption reduced income-tax provision by $1.2 million in Q2 and $10.6 million for the first half, contributing to the lower first-half effective tax rate. The company expects the 2018 revenue-recognition standard to shift recognition for most transportation services from delivery to transit, and potentially change certain sourcing revenue presentation from gross to net; it did not expect a material overall impact but was still evaluating systems and data requirements.
  • Foreign earnings were asserted to be indefinitely reinvested; repatriating all such earnings would increase taxes payable by an estimated $23.7 million. Routine litigation included 16 contingent auto-liability cases; the company said it could not estimate possible additional losses in some matters but did not expect resolution to have a material financial effect.
  • Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported during the quarter.

Important facts for investors to verify

  • Whether transportation pricing and carrier-cost trends continue to pressure net revenue margins, particularly in NAST truckload.
  • How much Global Forwarding growth and profitability is attributable to APC, and whether integration and acquisition costs evolve as expected.
  • Whether working-capital needs continue to constrain operating cash flow as revenue and transportation costs change.
  • Debt levels, variable-rate exposure, covenant compliance, and remaining availability under the revolving and securitization facilities.
  • The eventual quantified effects and presentation changes from adopting the new revenue-recognition standard, and the tax effects of stock-based compensation.