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CHRW > SEC Filings for CHRW > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for C H ROBINSON WORLDWIDE INC

Form 10-K for C H ROBINSON WORLDWIDE INC


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
The following table summarizes our total revenues by service line (in thousands):

For the years ended December 31,          2013             2012         Change          2011         Change
Transportation                       $ 11,069,710     $  9,685,415       14.3  %   $  8,740,524       10.8  %
Sourcing                                1,669,134        1,620,183        3.0         1,535,528        5.5
Payment Services                           13,232           53,515      (75.3 )          60,294      (11.2 )
Total                                $ 12,752,076     $ 11,359,113       12.3  %   $ 10,336,346        9.9  %

The following table illustrates our net revenue margins by services and products:

For the years ended December 31,  2013     2012     2011
Transportation                   15.3 %   15.8 %    16.5 %
Sourcing                          7.6      8.4       8.4
Payment Services                 81.2     99.0     100.0
Total                            14.4 %   15.1 %    15.8 %

The following table summarizes our net revenues by service line:

For the years ended December 31,

(Dollars in thousands)                   2013            2012         Change         2011         Change
Net revenues:
Transportation
Truckload                            $ 1,054,565     $ 1,060,120       (0.5 )%   $ 1,037,876       2.1  %
LTL                                      239,477         224,160        6.8          198,735      12.8
Intermodal                                39,084          38,815        0.7           41,189      (5.8 )
Ocean                                    187,671          84,924      121.0           66,873      27.0
Air                                       73,089          44,444       64.5           39,371      12.9
Customs                                   36,578          18,225      100.7           13,100      39.1
Other Logistics Services                  67,931          57,449       18.2           46,772      22.8
Total Transportation                   1,698,395       1,528,137       11.1        1,443,916       5.8
Sourcing                                 126,950         136,438       (7.0 )        128,448       6.2
Payment Services                          10,750          52,996      (79.7 )         60,294     (12.1 )
Total                                $ 1,836,095     $ 1,717,571        6.9  %   $ 1,632,658       5.2  %


Table of Contents

The following table represents certain statements of operations data, shown as percentages of our net revenues:

For the years ended December 31,                      2013      2012      2011
Net revenues                                        100.0  %   100.0 %   100.0 %
Operating expenses:
Personnel expenses                                   45.0       44.6      42.6
Other selling, general, and administrative expenses  17.8       16.1      14.9
Total operating expenses                             62.8       60.7      57.6
Income from operations                               37.2       39.3      42.4
Investment and other income                          (0.5 )     16.5       0.1
Income before provision for income taxes             36.7       55.8      42.6
Provision for income taxes                           14.0       21.2      16.1
Net income                                           22.7  %    34.6 %    26.4 %

OVERVIEW
Our company. We are a global provider of transportation services and logistics solutions, operating through a network of branch offices in North America, Europe, Asia, South America, and Australia. As a third party logistics provider, we enter into contractual relationships with a wide variety of transportation companies, and utilize those relationships to efficiently and cost effectively transport our customers' freight. We have contractual relationships with approximately 63,000 transportation companies, including motor carriers, railroads (primarily intermodal service providers), air freight, and ocean carriers. Depending on the needs of our customer and their supply chain requirements, we select and hire the appropriate transportation for each shipment. Our model enables us to be flexible, provide solutions that optimize service for our customers, and minimize our asset utilization risk. In addition to transportation and logistics services, we also offer fresh produce sourcing and fee-based payment services. Our Sourcing business is the buying, selling, and marketing of fresh produce. We purchase fresh produce through our network of produce suppliers and sell it to retail grocers and restaurant chains, produce wholesalers, and foodservice providers. In some cases, we also arrange the transportation of the produce we sell through our relationships with specialized transportation companies. Those revenues are reported as Transportation revenues. Historically, our Payment Services business consisted primarily of our former subsidiary T-Chek Systems, Inc. ("T-Chek"), which provided a variety of management and business intelligence services to motor carrier companies and to fuel distributors. On October 16, 2012, we sold substantially all of the assets and transferred certain liabilities of T-Chek to Electronic Funds Source ("EFS"). We continue to generate Payment Services revenues from the cash advance options we offer our contracted carriers. Our business model. We are primarily a service company. We add value and expertise in the procurement and execution of transportation and logistics, including sourcing of produce products for our customers. Our total revenues represent the total dollar value of services and goods we sell to our customers. Our net revenues are our total revenues less purchased transportation and related services, including contracted motor carrier, rail, ocean, air, and other costs, and the purchase price and services related to the products we source. Our net revenues are the primary indicator of our ability to source, add value, and sell services and products that are provided by third parties, and we consider them to be our primary performance measurement. Accordingly, the discussion of our results of operations below focuses on the changes in our net revenues.
We keep our business model as variable as possible to allow us to be flexible and adapt to changing economic and industry conditions. We sell transportation services and produce to our customers with varied pricing arrangements. Some prices are committed to for a period of time, subject to certain terms and conditions, and some prices are set on a spot market basis. We buy most of our truckload transportation capacity and produce on a spot market basis. Because of this, our net revenue per transaction tends to increase in times when there is excess supply and decrease in times when demand is strong relative to supply. We also keep our personnel and other operating expenses as variable as possible. Compensation is performance-oriented and, for most employees in the branch network, based on the profitability of their individual branch office. In addition, we do not have pre-committed targets for headcount. Our personnel decisions are decentralized. Our branch managers determine the appropriate number of employees for their offices, within productivity guidelines, based on their branch's volume of business. This helps keep our personnel expense as variable as possible with the business.


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Our branch network. Our branch network is a competitive advantage. Building local customer and contract carrier relationships has been an important part of our success, and our worldwide network of offices supports our core strategy of serving customers locally, nationally, and globally. Our branch offices help us penetrate local markets, provide face-to-face service when needed, and recruit contract carriers. Our branch network also gives us knowledge of local market conditions, which is important in the transportation industry because it is market driven and very dynamic.
In October 2012, we acquired all of the outstanding stock of the operating subsidiaries of Apreo Logistics S.A. ("Apreo"), a leading freight forwarder based in Warsaw, Poland. This acquisition enhances our truckload capabilities in Europe. In November 2012, we acquired all of the outstanding stock of Phoenix International Freight Services, Ltd, ("Phoenix"), an international freight forwarder based in Chicago, Illinois. Phoenix has a strong track record and diverse customer base in the international freight forwarding industry. This acquisition expanded our global forwarding network.
Our branches work together to complete transactions and collectively meet the needs of our customers. For large multi-location customers, we often coordinate our efforts in one branch and rely on multiple branch locations to deliver specific geographic or modal needs. As an example, approximately 46 percent of our truckload shipments are shared transactions between branches. Our methodology of providing services is very similar across all branches. The majority of our global network operates on a common technology platform that is used to match customer needs with supplier capabilities, to collaborate with other branch locations, and to utilize centralized support resources to complete all facets of the transaction.
Our people. Because we are a service company, our continued success is dependent on our ability to continue to hire and retain talented, productive people, and to properly align our headcount and personnel expense with our business. Our headcount grew by 747 employees during 2013. Branch employees act as a team in their sales efforts, customer service, and operations. A significant portion of many of our branch employees' compensation is performance-oriented, based on individual performance and the profitability of their branch. We believe this makes our employees more service-oriented and focused on driving growth and maximizing office productivity. All of our managers and certain other employees who have significant responsibilities are eligible to receive equity awards because we believe these awards are an effective tool for creating long-term ownership and alignment between employees and our shareholders. Generally, these awards are eligible to vest over five-year periods and also include financial performance-based requirements for management employees. In 2012 and 2013, we also issued restricted equity awards that vest evenly over five years, starting on December 31, 2013 and December 31, 2014.
Our customers. In 2013, we worked with more than 46,000 active customers, up from approximately 42,000 in 2012. We work with a wide variety of companies, ranging in size from Fortune 100 companies to small family businesses, in many different industries. Our customer base is very diverse and unconcentrated. Our top 100 customers represented approximately 32 percent of our total revenues and approximately 28 percent of our net revenues. Our largest customer was approximately three percent of our total revenues and approximately two percent of our total net revenues.
Our contracted carriers. Our contracted carrier base includes motor carriers, railroads (primarily intermodal service providers), air freight, and ocean carriers. In 2013, our carrier base was approximately 63,000, up from approximately 56,000 in 2012. Motor carriers that had fewer than 100 tractors transported approximately 83 percent of our truckload shipments in 2013. In our Transportation business, no single contracted carrier represents more than approximately two percent of our contracted carrier capacity.

2013 COMPARED TO 2012
Total revenues and direct costs. Our consolidated total revenues increased 12.3 percent in 2013 compared to 2012. Total Transportation revenues increased 14.3 percent to $11.1 billion in 2013 from $9.7 billion in 2012. This increase was driven by higher volumes in nearly all of our transportation modes, the Phoenix acquisition, and increased pricing to our customers, including the impacts of higher fuel costs. Total purchased transportation and related services increased 14.9 percent in 2013 to $9.4 billion from $8.2 billion in 2012. This increase was due to higher volumes in nearly all of our transportation modes, the Phoenix acquisition, and higher transportation costs. Our Sourcing revenue increased 3.0 percent to $1.7 billion in 2013 from $1.6 billion in 2012. This increase was primarily due to higher case volumes. Purchased products sourced for resale increased 3.9 percent in 2013 to $1.54 billion from $1.48 billion in 2012. This increase was primarily due to higher case volumes and higher cost per case. Our Payment Services revenue decreased 75.3 percent to $13.2 million in 2013 from $53.5 million in 2012. The decrease was due to the sale of substantially all of our Payment Services business, T-Chek, to EFS on October 16, 2012.
Net revenues. Total Transportation net revenues increased 11.1 percent to $1.70 billion in 2013 from $1.53 billion in 2012. Our Transportation net revenue margin decreased to 15.3 percent in 2013 from 15.8 percent in 2012 largely driven by higher transportation costs, partially offset by an increase in transportation rates charged to our customers.


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Our truckload net revenues decreased 0.5 percent to $1.05 billion in 2013 from $1.06 billion in 2012. Truckload volumes increased approximately ten percent in 2013. Truckload net revenue margin decreased in 2013 due to increased cost of capacity, partially offset by increased rates charged to our customers. Excluding the estimated impact of the change in fuel, on average, our truckload rates increased approximately two percent in 2013. Our truckload transportation costs increased approximately three percent, excluding the estimated impacts of the change in fuel.
LTL net revenues increased 6.8 percent to $239.5 million in 2013 from $224.2 million in 2012. The increase in net revenues was driven by an increase in total shipments of seven percent, partially offset by decreased net revenue margin. Our LTL transportation costs are increasing, while customer pricing has not kept up with increases in carrier costs.
Our intermodal net revenue increase of 0.7 percent to $39.1 million in 2013 from $38.8 million in 2012 was driven largely by a change in the mix of business and improved customer pricing, partially offset by volume declines.
Our ocean transportation net revenues increased 121.0 percent to $187.7 million in 2013 from $84.9 million in 2012. Our air transportation net revenues increased 64.5 percent to $73.1 million in 2013 from $44.4 million in 2012. Our customs net revenues increased 100.7 percent to $36.6 million in 2013 from $18.2 million in 2012. These increases were primarily driven by our acquisition of Phoenix.
Other logistics services net revenues, which include transportation management services, warehousing, and small parcel, increased 18.2 percent to $67.9 million in 2013 from $57.4 million in 2012. This increase was primarily due to an increase in warehouse services.
Sourcing net revenues decreased 7.0 percent to $127.0 million in 2013 from $136.4 million in 2012. This decrease was primarily due to a reduction in business with a large customer and a decrease in net revenue per case, partially offset by increased volumes. We expect the revenue declines with this large customer to continue in 2014. Our net revenue margin decreased to 7.6 percent in 2013 compared to 8.4 percent in 2012.
Historically, Payment Services was comprised primarily of revenue related to our former subsidiary, T-Chek. Payment Services net revenues decreased 79.7 percent to $10.8 million in 2013 from $53.0 million in 2012. The decrease was due to the T-Chek divestiture on October 16, 2012. We continue to generate Payment Services revenues from the cash advance options we offer our contracted carriers. Operating expenses. Operating expenses increased 10.7 percent to $1.2 billion in 2013 from $1.0 billion in 2012. This was due to an increase of 7.9 percent in personnel expenses and an increase of 18.3 percent in other selling, general, and administrative expenses. As a percentage of net revenues, operating expenses increased to 62.8 percent in 2013 from 60.7 percent in 2012. This increase was primarily due to increased personnel and other selling, general, and administrative expenses as a result of our acquisitions in 2012. Our personnel expenses are driven by headcount and earnings growth. In 2013, personnel expenses increased to $826.7 million from $766.0 million in 2012. Our personnel expenses as a percentage of net revenue increased in 2013 to 45.0 percent from 44.6 percent in 2012. In 2013, our average headcount increased approximately 25 percent, related primarily to the acquisitions of Apreo and Phoenix. The increase in personnel expense from headcount growth was partially offset by declines in expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability. Other selling, general, and administrative expenses increased 18.3 percent to $326.8 million in 2013 from $276.2 million in 2012. The increase in our selling, general, and administrative expenses is primarily related to an increase in amortization of intangible assets acquired, occupancy, and travel, partially offset by a reduction in purchased professional services.
Income from operations. Income from operations increased 1.1 percent to $682.7 million in 2013 from $675.3 million in 2012. Income from operations as a percentage of net revenues decreased to 37.2 percent in 2013 from 39.3 percent in 2012. This decrease was due to our expenses growing faster than our net revenues. Additionally, Phoenix has a higher operating expense to net revenue ratio than C.H. Robinson has historically experienced.
Investment and other (expense) income. Investment and other (expense) income was an expense of $9.3 million in 2013 compared to income of $283.1 million in 2012. In 2013, we recorded interest expense on borrowings of $11.1 million. In 2012, we recorded a gain of $281.6 million on the divestiture of substantially all of our T-Chek business.
Provision for income taxes. Our effective income tax rate was 38.2 percent for 2013 and 38.0 percent for 2012. The effective income tax rate for both periods is greater than the statutory federal income tax rate primarily due to state income taxes, net of federal benefit.


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Net income. Net income decreased 30.0 percent to $415.9 million in 2013 from $593.8 million in 2012. Basic net income per share decreased 28.0 percent to $2.65. Diluted net income per share decreased 27.8 percent to $2.65.

2012 COMPARED TO 2011
Total revenues and direct costs. Our consolidated total revenues increased 9.9 percent in 2012 compared to 2011. Total Transportation revenues increased 10.8 percent to $9.69 billion in 2012 from $8.74 billion in 2011. This increase was driven by higher volumes in all of our transportation modes and increased pricing to our customers, including the impacts of higher fuel costs. Total purchased transportation and related services increased 11.8 percent in 2012 to $8.16 billion from $7.30 billion in 2011. This increase was due to higher volumes in all of our transportation modes and higher transportation costs, including the impacts of higher fuel costs. Our Sourcing revenue increased 5.5 percent to $1.62 billion in 2012 from $1.54 billion in 2011. Purchased products sourced for resale increased 5.4 percent in 2012 to $1.48 billion from $1.41 billion in 2011. These increases were primarily due to higher case volumes. Our Payment Services revenue decreased 11.2 percent to $53.5 million in 2012 from $60.3 million in 2011. The decrease was due to the sale of substantially all of our Payment Services business, T-Chek, to Electronic Funds Source, LLC on October 16, 2012.
Net revenues. Total Transportation net revenues increased 5.8 percent to $1.53 billion in 2012 from $1.44 billion in 2011. Our Transportation net revenue margin decreased to 15.8 percent in 2012 from 16.5 percent in 2011 largely driven by higher transportation costs and higher fuel costs, partially offset by an increase in transportation rates charged to our customers. While our different pricing arrangements with customers and contract carriers make it very difficult to measure the precise impact, we believe that fuel costs essentially act as a pass-through in our truckload business. Therefore, in times of higher fuel prices, our net revenue margin percentage decreases, as it did in 2012. Our truckload net revenues increased 2.1 percent to $1.06 billion in 2012 from $1.04 billion in 2011. Truckload volumes increased approximately ten percent in 2012. Truckload net revenue margin decreased in 2012 due to increased cost of capacity and an increase in fuel prices, partially offset by increased rates charged to our customers. Excluding the estimated impact of the change in fuel, on average, our truckload rates increased approximately one percent in 2012. Our truckload transportation costs increased approximately two percent, excluding the estimated impacts of the change in fuel.
During 2012, our LTL net revenues increased approximately 13 percent to $224.2 million from $198.7 million in 2011. The increase was driven primarily by an increase in shipment volumes and increased pricing to our customers, partially offset by increased cost of capacity. Our LTL volumes increased approximately 16 percent compared to 2011.
Our intermodal net revenue decrease of 5.8 percent to $38.8 million in 2012 from $41.2 million in 2011 was driven largely by increased cost of capacity. Our ocean transportation net revenues increased 27.0 percent to $84.9 million in 2012 from $66.9 million in 2011. Our air transportation net revenues increased 12.9 percent to $44.4 million in 2012 from $39.4 million in 2011. Our customs net revenues increased 39.1 percent to $18.2 million in 2012 from $13.1 million in 2011. These increases were primarily due to our acquisition of Phoenix on November 1, 2012.
Other logistics services net revenues, which include transportation management services, warehousing, and small parcel, increased 22.8 percent to $57.4 million in 2012 from $46.8 million in 2011. This increase was primarily due to transaction increases in our transportation management services. Sourcing net revenues increased 6.2 percent to $136.4 million in 2012 from $128.4 million in 2011. This increase was primarily due to increased volumes and a slight increase in net revenue per case. Our net revenue margin remained at 8.4 percent in 2012 compared to 2011.
Historically, Payment Services was comprised primarily of revenue related to our former subsidiary, T-Chek. Payment Services net revenues decreased 12.1 percent to $53.0 million in 2012 from $60.3 million in 2011. The decrease was due to the T-Chek divestiture on October 16, 2012. We recorded a gain of $281.6 million related to this divestiture in 2012. We continue to generate Payment Services revenues from the cash advance options we offer our contracted carriers. Operating expenses. Operating expenses increased 10.9 percent to $1.04 billion in 2012 from $939.9 million in 2011. This was due to an increase of 10.0 percent in personnel expenses and an increase of 13.4 percent in other selling, general, and administrative expenses. As a percentage of net revenues, operating expenses increased to 60.7 percent in 2012 from 57.6 percent in 2011. This increase was primarily due to increased personnel and other selling, general, and administrative expenses incurred because of our acquisitions and divestitures in 2012.


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Our personnel expenses are driven by headcount and earnings growth. In 2012, personnel expenses increased to $766.0 million from $696.2 million in 2011. Our personnel expenses as a percentage of net revenue increased in 2012 to 44.6 percent from 42.6 percent in 2011. These increases were primarily due to an increase in vesting expense of $33.0 million of our equity awards triggered by the gain on the divestiture of T-Chek. In 2012, our average headcount increased approximately 13.6 percent, due primarily to the acquisitions of Apreo and Phoenix. Personnel expenses related to our various incentive plans are designed to keep expenses variable with changes in net revenues and profitability. Other selling, general, and administrative expenses increased 13.4 percent to $276.2 million in 2012 from $243.7 million in 2011. Approximately $10.6 million of this increase is related to investment banking and other external legal and accounting fees paid for the acquisitions and divestitures in 2012. The remaining increase in our selling, general, and administrative expenses is primarily related to an increase in travel, amortization of intangible assets acquired, temporary services, and warehouse expenses, partially offset by a reduction in claims.
Income from operations. Income from operations decreased 2.5 percent to $675.3 million in 2012 from $692.7 million in 2011. Income from operations as a percentage of net revenues decreased to 39.3 percent in 2012 from 42.4 percent in 2011. These decreases were primarily related to the increases in operating expenses, offset partially by an increase in net revenues.
Investment and other income. Investment and other income increased to $283.1 million in 2012 compared to $2.0 million in 2011. In 2012, we recorded a gain of $281.6 million on the divestiture of substantially all of our T-Chek business. Provision for income taxes. Our effective income tax rate was 38.0 percent for 2012 and 37.9 percent for 2011. The effective income tax rate for both periods is greater than the statutory federal income tax rate primarily due to state income taxes, net of federal benefit.
Net income. Net income increased 37.6 percent to $593.8 million in 2012 from $431.6 million in 2011. Basic net income per share increased 39.9 percent to $3.68. Diluted net income per share increased 40.1 percent to $3.67.

LIQUIDITY AND CAPITAL RESOURCES
We have historically generated substantial cash from operations, which has enabled us to fund our growth while paying cash dividends and repurchasing stock. In 2012, we entered into a senior unsecured revolving credit facility to partially fund the acquisition of Phoenix. In 2013, we entered into a Note Purchase Agreement to fund the accelerated share repurchase agreements to repurchase $500.0 million worth of our common stock. We also expect to use the revolving credit facility, and potentially other indebtedness incurred in the future, to assist us in continuing to fund working capital, capital expenditures, dividends, and share repurchases. Cash and cash equivalents totaled $162.0 million and $210.0 million as of December 31, 2013 and 2012. Cash and cash equivalents held outside the United States totaled $80.2 million and $103.3 million as of December 31, 2013 and 2012. Working capital at December 31, 2013 and 2012 was $394.5 million and $440.1 million.
We prioritize our investments to grow the business, as we require some working capital and a relatively small amount of capital expenditures to grow. We are continually looking for acquisitions, but those acquisitions must fit our culture and enhance our growth opportunities.
Cash flow from operating activities. We generated $347.8 million, $460.3 million, and $429.7 million of cash flow from operations in 2013, 2012, and 2011. During 2013, our cash flow from operations decreased 24.5 percent compared to a 30.0 percent decrease in net income. During the first quarter of 2013, we used $111.8 million to fund the payment of income taxes, primarily related to the gain recognized on the divestiture of T-Chek. . . .

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