C.H. Robinson Worldwide, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company is a global third-party transportation and logistics provider and also sources fresh produce. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $3,355.8 | $3,419.3 | $9,729.4 | $10,265.2 |
| Net revenue | $558.5 | $588.6 | $1,716.0 | $1,697.7 |
| Operating income | $211.3 | $232.7 | $644.0 | $643.7 |
| Net income | $129.0 | $139.4 | $391.1 | $383.1 |
| Diluted EPS | $0.90 | $0.96 | $2.73 | $2.63 |
- Q3 total revenue fell 1.9% year over year; net revenue fell 5.1%. Nine-month total revenue declined 5.2%, while net revenue increased 1.1%. The company identifies net revenue—revenue less direct transportation and sourced-product costs—as its primary performance measure.
- Q3 operating income declined 9.2% and net income declined 7.5%; nine-month operating income was nearly flat and net income rose 2.1%.
- Net revenue margin was 16.6% in Q3 versus 17.2% a year earlier, and 17.6% for nine months versus 16.5%. Operating income as a share of net revenue was 37.8% and 37.5%, respectively, compared with 39.5% and 37.9% in the prior periods.
- Q3 transportation net revenue declined 5.6%, principally reflecting customer rates falling more than transportation costs. For nine months, transportation net revenue increased 1.0% as costs fell more than customer pricing. Sourcing net revenue rose 4.7% in Q3 and 2.8% for nine months.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $376.8 million, down from $464.4 million. The company attributed the decline mainly to a $51.1 million reduction in accrued compensation and profit-sharing liabilities and higher receivables.
- Investing activities used $292.0 million, including $220.2 million net cash for APC Logistics and $71.1 million in capital expenditures. Financing activities used $28.2 million. Cash increased by $56.2 million to $224.4 million.
- At September 30, cash was $224.4 million, current assets were $1,967.5 million, and current liabilities were $1,799.8 million; working capital was $167.8 million, down from $282.1 million at year-end 2015.
- Debt totaled $1.225 billion: $725 million drawn on the revolving facility, classified as current, and $500 million in senior notes. The revolving facility has $900 million of capacity and expires in December 2019. The reported quarter-end rate on revolver borrowings was approximately 1.5%; senior notes carry fixed rates of 3.97%–4.60% and mature from 2023 to 2033. The company was in compliance with debt covenants.
- Cash dividends paid in the first nine months were $191.1 million; share repurchases were $109.1 million. Management said available cash, expected operating cash generation, and borrowing availability should meet foreseeable working-capital, capital expenditure, and dividend needs.
Material changes, outlook, and risks
- On September 30, 2016, the company acquired APC Logistics, an Australia- and New Zealand-based freight forwarding and customs brokerage provider, for approximately $229.1 million in cash. The purchase-price allocation is preliminary; goodwill recorded was $166.3 million and is not expected to be tax deductible. The acquisition added 313 employees, and related internal-control changes had not yet been fully evaluated.
- Q3 North American truckload volume grew approximately 7.5%, but truckload net revenue fell 10.4%; customer rates excluding estimated fuel effects declined about 5.5%, while transportation costs declined about 3.5%. Lower-cost truck capacity also weighed on intermodal results.
- Ocean net revenue was affected by higher capacity costs and lower margins on fixed-price business, primarily following Hanjin Shipping Co.’s bankruptcy. Other logistics services net revenue grew 31.0% in Q3, mainly on managed-services volume growth.
- The company reported no specific numerical earnings or revenue guidance. Its outlook discussion is forward-looking and subject to risks including economic conditions, pricing and competition, freight demand and carrier capacity, customer and carrier relationships, acquisition integration, international operations, regulation, fuel, litigation and contingent auto liability, produce safety, and cybersecurity.
- The company’s decision to indefinitely reinvest foreign subsidiary earnings reduced deferred taxes by $1.9 million in Q3 and $4.4 million for nine months, lowering effective tax rates versus 2015. Effective rates were 36.7% and 37.1%, respectively.
- Routine litigation included 18 contingent auto-liability cases; the company said recorded amounts were not material and expected no material overall effect, while noting that additional-loss estimates may not be possible. A hypothetical 100-basis-point interest-rate change was not expected to materially affect earnings.
Important facts for investors to verify
- Whether the deterioration in Q3 transportation margins and operating leverage persists, particularly in truckload pricing and ocean capacity costs.
- APC Logistics’ integration, final purchase accounting, contribution to growth, and effect on controls and cash generation.
- Working-capital and receivables trends, given the decline in operating cash flow and working capital.
- Debt levels, revolver availability, variable-rate exposure, and continued compliance with financial covenants.
- Capital returns and the sustainability of dividends and repurchases alongside acquisition and technology spending.