C.H. Robinson Worldwide, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The company is a global third-party transportation and logistics provider, with produce sourcing and residual payment-services operations. Management identifies net revenues—total revenues less direct transportation and product costs—as its primary performance measure.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenues | $3,316.7 million | $2,880.4 million | $9,599.2 million | $8,388.2 million |
| Net revenues | $463.3 million | $432.7 million | $1,391.6 million | $1,272.9 million |
| Income from operations | $176.4 million | $187.3 million | $527.5 million | $541.7 million |
| Net income | $107.7 million | $116.3 million | $323.0 million | $337.4 million |
| Diluted EPS | $0.69 | $0.72 | $2.03 | $2.08 |
- Q3 total revenue rose 15.1%, while net revenue increased 7.1%; operating income fell 5.8% and net income fell 7.4%. Nine-month total revenue rose 14.4% and net revenue 9.3%, while operating income declined 2.6% and net income 4.3%.
- Net revenue margin declined to 14.0% in Q3 from 15.0%; transportation margin was 14.9% versus 15.6%, and sourcing margin was 7.1% versus 8.1%. Operating income as a share of net revenue fell to 38.1% from 43.3% in Q3, and to 37.9% from 42.6% for nine months.
- For the first nine months, operating cash flow was $182.9 million, down from $267.2 million. Investing activities used $14.9 million; financing activities used $246.2 million. Cash decreased by $80.3 million to $129.7 million.
- At September 30, cash was $129.7 million and working capital was $447.2 million. Debt totaled $850 million: $350 million outstanding under the revolving facility, classified as current, and $500 million in long-term notes. The revolver interest rate was approximately 1.2% at quarter-end; the notes carry fixed rates of 3.97%–4.60%. The company reported compliance with debt covenants.
Material changes and drivers
- Transportation growth reflected higher volumes and acquisitions. Q3 truckload volume rose approximately 13%, but truckload net revenue declined 1.3% as capacity costs increased faster than customer rates. Phoenix acquisition effects drove strong growth in ocean, air, customs, and other international forwarding services.
- Operating expenses grew faster than net revenues, reflecting approximately 30% higher average headcount, primarily from Phoenix and Apreo, acquisition-related amortization, and Phoenix’s higher operating-expense-to-net-revenue ratio. Organic headcount also increased.
- Sourcing net revenue fell 9.5% in Q3 amid lower crop yields associated primarily with weather, increased product costs, and lost commodity business with a significant customer. Payment-services revenue and net revenue declined sharply following the October 2012 sale of substantially all T-Chek operations.
- The company sold $500 million of senior notes in August and used the proceeds to fund a $500 million accelerated share repurchase. It received 6.1 million shares in the initial delivery; remaining settlement was expected between December 2013 and April 2014. Nine-month share repurchases totaled $663.4 million, and cash dividends totaled $167.1 million.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management said cash, expected operating cash generation, borrowing capacity, and access to credit should be sufficient for anticipated working capital, capital expenditures, dividends, and repurchases, assuming no change to the business plan.
- Management cited risks from economic conditions, service-demand and pricing pressure, competition, truck capacity and freight costs, carrier and customer relationship changes, acquisition integration, international operations, regulation, fuel, produce safety and contamination, and litigation including contingent auto liability.
- A $5.0 million contingent auto-liability settlement charge was recorded in Q2 and paid in Q3; management said it represented the company’s retained insurance risk. Routine litigation remained, including contingent auto cases; probable and estimable accruals were not material, and possible additional losses could not be estimated.
- The company expected to complete a new Eden Prairie office building in Q1 2014 at an estimated total cost of approximately $18 million; $8.9 million had been spent through September 30. Disclosure controls were deemed effective. Management had not yet fully evaluated internal-control changes associated with the 2012 acquisitions.
Important facts for investors to verify
- Whether transportation and sourcing margins stabilize as carrier costs, customer pricing, and produce costs change.
- Whether Phoenix and Apreo integration delivers growth without further pressure on operating expenses and margins.
- Cash conversion and working-capital trends, including the effect of tax payments related primarily to the T-Chek divestiture.
- Debt levels, covenant compliance, interest-rate exposure, and the final share count and settlement cost of the accelerated repurchase.
- Final Phoenix purchase accounting, acquisition-related amortization, and developments in auto-liability and other litigation.