C.H. Robinson Worldwide, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; compared with the same periods in 2013. The company is a global third-party transportation and logistics provider, with produce sourcing and fee-based carrier payment services. It reports one operating segment. Financial statements are unaudited.
Financial performance
- Second quarter: Revenue was $3.503 billion, up 6.5%; net revenue was $521.0 million, up 10.2%. Operating income increased 9.8% to $200.4 million, while net income increased 6.0% to $118.6 million. Diluted EPS was $0.80 versus $0.70.
- First six months: Revenue was $6.646 billion, up 5.8%; net revenue was $978.3 million, up 5.4%. Operating income rose 1.8% to $357.4 million, while net income declined 1.6% to $211.8 million. Diluted EPS rose to $1.43 from $1.34, benefiting from fewer shares outstanding.
- Margins: Net revenue margin was 14.9% for Q2 versus 14.4% a year earlier, and 14.7% for the six months versus 14.8%. Operating income was 38.5% of net revenue in Q2 versus 38.6%, and 36.5% for the six months versus 37.8%.
- Business mix: Q2 transportation net revenue grew 12.2% to $483.6 million, led by truckload growth of 15.6%. Sourcing net revenue declined 10.0% to $34.9 million; payment services net revenue fell 4.2% to $2.6 million. For the six months, transportation net revenue grew 6.9%, while sourcing declined 12.5% and payment services declined 4.3%.
- Cash flow: Operating cash flow was $128.4 million for the first half, versus $58.3 million in 2013. Investing activities used $18.6 million; financing activities used $127.5 million. Cash declined $17.8 million to $144.2 million.
Liquidity, debt and balance sheet
- At June 30, 2014, cash was $144.2 million and working capital was $478.2 million. Receivables were $1.700 billion; the doubtful-account allowance was $44.3 million, up from $39.3 million at year-end.
- Total debt was $900 million: $400 million outstanding under the revolving credit facility, classified as current, and $500 million in fixed-rate senior notes. The revolver bears a variable rate; the reported rate was approximately 1.7% at quarter-end. The notes carry coupons of 3.97%, 4.26% and 4.60%, with maturities from 2023 to 2033.
- The company reported compliance with debt covenants. Management said available cash, expected operating cash generation and borrowing capacity should meet anticipated working capital, capital expenditure and dividend needs in the foreseeable future.
- First-half capital expenditures were $18.8 million, primarily for technology and systems; the company also completed an $18.5 million corporate-campus office building in Q1.
Material changes and management commentary
- Transportation growth reflected higher customer rates and increased volume across many modes. In North American truckload, customer rates per mile rose about 10% in Q2, excluding estimated fuel effects, while transportation costs per mile rose about 9%; the company cited a greater mix of shorter-haul freight.
- Personnel expense increased 16.0% in Q2 and 9.7% for the first half, reflecting incentive-plan costs and higher average headcount. For the first half, operating expenses rose 7.6% and increased as a share of net revenue, contributing to lower operating margin.
- The company expected sourcing revenue declines from a large customer to continue throughout 2014. Sourcing volumes were also affected by drought conditions in the U.S. West Coast.
- Shareholders received $104.9 million in cash dividends in the first half, and the company repurchased $48.9 million of shares. 11.95 million shares remained authorized for future repurchases at June 30; future repurchases would depend on cash needs and market conditions.
Risks, contingencies and unusual items
- Key disclosed risks include economic and freight-demand changes, pricing and competition, truck capacity and carrier costs, customer or carrier relationship changes, acquisition integration, fuel, regulation, international operations, produce safety, and litigation and insurance exposure.
- The company reported routine litigation, including 17 contingent auto liability cases in the notes. Accrued amounts were not material; management did not expect resolution to materially affect results, while noting it could not estimate additional reasonably possible losses for some proceedings.
- Q2 and first-half 2013 included a $5.0 million charge for settlement of a contingent auto liability claim. First-half 2013 operating cash flow was also affected by $111.8 million of income-tax payments, primarily related to a gain on the T-Chek divestiture.
- Interest expense rose substantially year over year, primarily due to the senior notes issued in 2013 to fund the accelerated share repurchase. Management said a hypothetical 100-basis-point interest-rate change would not materially affect earnings.
- No formal earnings or revenue guidance was provided. Forward-looking statements are subject to the risks described in the filing and the company’s 2013 Form 10-K.
Important facts for investors to verify
- Whether transportation volume and rate growth can offset higher carrier costs and operating expenses, especially the weaker first-half margins.
- The duration and financial impact of the large-customer sourcing decline and West Coast drought effects.
- Receivables growth, the higher doubtful-account allowance and related collection or credit risks.
- Debt levels, variable-rate exposure, covenant compliance and capacity for dividends and share repurchases.
- The continuation of share repurchases and the extent to which lower share count, rather than net-income growth, supports EPS growth.