C. H. ROBINSON WORLDWIDE, INC. quarterly report, Q1 FY2017

C.H. Robinson Worldwide, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; unaudited. C.H. Robinson is a global transportation and logistics provider, with sourcing services, reporting through NAST, Global Forwarding, Robinson Fresh, and All Other and Corporate.

Financial performance and liquidity

Metric	Q1 2017	Q1 2016 / change
Total revenue	$3.415 billion	$3.074 billion; +11.1%
Net revenue	$568.6 million	$563.3 million; +0.9%
Income from operations	$188.0 million	$199.0 million; -5.5%
Net income	$122.1 million	$119.0 million; +2.6%
Diluted EPS	$0.86	$0.83; +3.6%
Cash from operations	$92.7 million	$104.2 million

• Margins: Net revenue as a percentage of total revenue was 16.6%, down from 18.3%. Transportation margin declined to 17.3% from 19.7%; sourcing margin improved to 9.7% from 8.1%. Operating income was 33.1% of net revenue, versus 35.3%.
• Cash and working capital: Cash and equivalents were $229.8 million at March 31, versus $247.7 million at year-end. Working capital was $215.2 million. Operating cash flow was lower year over year, which management attributed principally to increased working-capital needs as volumes, rates, and fuel prices rose.
• Debt and liquidity: Debt totaled $1.24 billion: $740 million outstanding on the revolving facility and $500 million of senior notes. The revolver had $160 million remaining availability; the company reported compliance with debt covenants. Cash dividends paid were $64.6 million; declared dividends were $0.45 per share, compared with $0.43.
• Other measures: Capital expenditures were $16.7 million. The effective tax rate was 31.7%, versus 37.4%. EBITDA is not clearly provided as a reported financial measure in the filing text.

Material changes and operating drivers

• Transportation revenue rose 14.3%, but transportation net revenue increased only 0.8%; purchased transportation costs grew faster than customer pricing, compressing margins. Management cited higher transportation costs, including fuel, across nearly all services.
• Sourcing revenue fell 13.1%, largely because of lower product prices from lower commodity costs and a 1% decline in case volumes. Sourcing net revenue nevertheless grew 3.9% as product costs fell slightly more than sales prices per case.
• NAST net revenue declined 3.0% and operating income declined 4.0%, with lower truckload pricing a key factor. Truckload volume increased approximately 11%, while average customer truckload rate per mile, excluding estimated fuel effects, declined approximately 4%.
• Global Forwarding net revenue increased 14.7%, primarily reflecting the APC Logistics acquisition; segment operating income decreased 3.9% as expenses, including acquisition-related amortization, rose.
• Robinson Fresh net revenue decreased 2.3% and operating income decreased 17.4%, reflecting lower transportation net revenue and higher operating expenses. APC-related headcount contributed to the company-wide average headcount increase of 7.8% year over year.

Outlook, risks, contingencies, and unusual items

• The filing provides no specific earnings or revenue guidance. Management said available cash, expected operating cash flow, revolver availability, and access to credit were expected to meet foreseeable working-capital, capital-expenditure, and dividend needs, assuming no change in the current business plan.
• Key risks cited include economic and demand changes; pricing pressure and competition; freight capacity, costs, and carrier relationships; customer changes; acquisition integration; litigation and contingent auto liability; international operations; regulation; produce safety; fuel; and cybersecurity.
• Two items materially affected comparison of earnings: adoption of stock-compensation accounting guidance reduced Q1 2017 income tax provision by $9.3 million; and resolution of a legal claim reduced SG&A by $8.75 million, increasing operating income. Neither should be assumed to recur.
• Routine litigation included 17 contingent auto liability cases; the company said accrued amounts were not material and did not expect resolution of proceedings to materially affect financial results, while noting additional losses could not always be estimated.
• After quarter-end, the company entered a receivables securitization facility of up to $250 million, expiring April 26, 2019 unless extended. Proceeds were used to pay down the revolving credit facility. This is a subsequent event, not a March 31 balance-sheet borrowing.
• Revenue recognition guidance was scheduled for adoption in 2018, with no material impact expected by management. New lease guidance was expected to increase reported assets and liabilities when adopted in 2019; the impact was still under evaluation.

Important facts for investors to verify

• Whether transportation pricing and cost trends continue to pressure net revenue and margins, particularly in NAST truckload.
• How much of Global Forwarding growth and costs reflect APC, and whether the acquisition delivers expected benefits as purchase accounting is finalized.
• Whether working-capital demands continue to weigh on operating cash flow, and how the receivables facility affects liquidity and debt usage.
• How much of Q1 net-income growth depended on the $9.3 million tax benefit and the $8.75 million legal-claim recovery.
• Debt covenant headroom and refinancing or interest-rate exposure; the filing reports covenant compliance, but does not provide a clear current leverage ratio.