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CHRW > SEC Filings for CHRW > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for C H ROBINSON WORLDWIDE INC

Form 10-Q for C H ROBINSON WORLDWIDE INC


12-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes.

FORWARD-LOOKING INFORMATION
Our quarterly report on Form 10-Q, including this discussion and analysis of our financial condition and results of operations and our disclosures about market risk, contains certain "forward-looking statements". These statements represent our expectations, beliefs, intentions, or strategies concerning future events that, by their nature, involve risks and uncertainties. Forward looking statements include, among others, statements about our future performance, the continuation of historical trends, the sufficiency of our sources of capital for future needs, the effects of acquisitions or dispositions, the expected impact of recently issued accounting pronouncements, and the outcome or effects of litigation. Risks that could cause actual results to differ materially from our current expectations include changes in economic conditions; changes in market demand and pressures on the pricing for our services; competition and growth rates within the third party logistics industry; freight levels and increasing costs and availability of truck capacity or alternative means of transporting freight; changes in relationships with existing contracted truck, rail, ocean, and air carriers; changes in our customer base due to possible consolidation among our customers; our ability to successfully integrate the operations of acquired companies with our historic operations; risks associated with litigation, including contingent auto liability and insurance coverage; risks associated with operations outside of the U.S.; risks associated with the potential impacts of changes in government regulations; risks associated with the produce industry, including food safety and contamination issues; fuel price increases or shortages; the impact of war on the economy; changes to our share repurchase activity; and other risks and uncertainties detailed in our Annual and Quarterly Reports. Therefore, actual results may differ materially from our expectations based on these and other risks and uncertainties, including those described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update such statement to reflect events or circumstances arising after such date.
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, and South America. As a third party logistics provider, we cultivate 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. Our fee-based payment service revenues are derived from a cash advance option 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.


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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 individual performance and the profitability of their 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.
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.
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 27 employees during the first quarter of 2014. 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 vest over five-year periods and also include performance-based requirements. In 2013, we also issued restricted equity awards that vest evenly over five years, starting on 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 in 2013. Our largest customer was approximately three percent of our total revenues and approximately two percent of our total net revenues in 2013.
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.


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RESULTS OF OPERATIONS
The following table summarizes our total revenues by service line (in
thousands):
                      Three Months Ended March 31,
                     2014           2013       % change
Transportation   $ 2,803,704    $ 2,603,182       7.7  %
Sourcing             335,808        387,852     (13.4 )%
Payment Services       3,073          3,233      (4.9 )%
Total            $ 3,142,585    $ 2,994,267       5.0  %

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

Three Months Ended March 31,
                      2014               2013
Transportation          15.3 %              16.2 %
Sourcing                 8.0 %               8.2 %
Payment Services        81.7 %              81.2 %
Total                   14.5 %              15.2 %

The following table summarizes our net revenues by service line (dollars in thousands):

                               Three Months Ended March 31,
                              2014            2013      % change
Transportation
Truckload                $   269,837       $ 268,604       0.5  %
LTL (1)                       60,138          58,491       2.8  %
Intermodal                     8,940           9,101      (1.8 )%
Ocean                         43,612          42,488       2.6  %
Air                           17,454          16,768       4.1  %
Customs                        9,332           8,606       8.4  %
Other Logistics Services      18,566          17,194       8.0  %
Total Transportation         427,879         421,252       1.6  %
Sourcing                      26,846          31,846     (15.7 )%
Payment Services               2,510           2,624      (4.3 )%
Total                    $   457,235       $ 455,722       0.3  %

(1) Less-than-truckload ("LTL")


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

                                                      Three Months Ended March 31,
                                                         2014              2013
Net revenues                                             100.0  %           100.0 %
Operating expenses:
Personnel expenses                                        48.2  %            46.7 %
Other selling, general, and administrative expenses       17.5  %            16.3 %
Total operating expenses                                  65.7  %            63.0 %
Income from operations                                    34.3  %            37.0 %
Investment and other (expense) income                     (1.3 )%               - %
Income before provision for income taxes                  33.0  %            37.0 %
Provision for income taxes                                12.6  %            14.3 %
Net income                                                20.4  %            22.7 %

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 Total revenues and direct costs. Our consolidated total revenues increased 5.0 percent in the first quarter of 2014 compared to the first quarter of 2013. Total Transportation revenues increased 7.7 percent to $2.8 billion in the first quarter of 2014 from $2.6 billion in the first quarter of 2013. This increase was driven by higher customer rates and increased volumes in many of our transportation modes. Total purchased transportation and related services increased 8.9 percent in the first quarter of 2014 to $2.4 billion from $2.2 billion in the first quarter of 2013. This increase was due to higher transportation costs and higher volumes in many of our transportation modes. Our Sourcing revenue decreased 13.4 percent to $335.8 million in the first quarter of 2014 from $387.9 million in the first quarter of 2013. Purchased products sourced for resale decreased 13.2 percent in the first quarter of 2014 to $309.0 million from $356.0 million in the first quarter of 2013. These decreases were primarily due to volume and revenue decreases from a large customer. Our Payment Services revenue decreased 5.0 percent to $3.1 million in the first quarter of 2014 from $3.2 million in the first quarter of 2013.
Net revenues. Total Transportation net revenues increased 1.6 percent to $427.9 million in the first quarter of 2014 from $421.3 million in the first quarter of 2013. Our Transportation net revenue margin decreased to 15.3 percent in the first quarter of 2014 from 16.2 percent in the first quarter of 2013. Our truckload net revenues increased 0.5 percent to $269.8 million in the first quarter of 2014 from $268.6 million in the first quarter of 2013; 94 percent of these revenues are derived from North America. Truckload volumes increased approximately four percent in the first quarter of 2014 compared to the first quarter of 2013. Our North American truckload volumes increased approximately three percent. Volume growth was impacted by capacity constraints caused by the many weather events across North America during the first quarter of 2014. Truckload net revenue margin decreased in the first quarter of 2014 compared to the first quarter of 2013, due primarily to increased cost per mile. In North America, excluding the estimated impacts of the change in fuel, our average truckload rate per mile charged to our customers increased approximately 10 percent in the first quarter of 2014 compared to the first quarter of 2013. In North America, our truckload transportation costs increased approximately 12 percent, excluding the estimated impacts of the change in fuel.
Our LTL net revenues increased 2.8 percent to $60.1 million in the first quarter of 2014 from $58.5 million in the first quarter of 2013. Our LTL net revenue growth rate slowed in the first quarter of 2014 compared to the first quarter of 2013 partially as a result of weather related issues. LTL net revenue margin decreased slightly in the first quarter of 2014 compared to the first quarter of 2013, primarily due to carrier price increases.
Our intermodal net revenue decreased 1.8 percent to $8.9 million in the first quarter of 2014 from $9.1 million in the first quarter of 2013. This was primarily due to a decline in volume caused by severe weather events during the quarter. Volume declines were partially offset by an increase in net revenue margin, driven by improved customer pricing.
Our ocean transportation net revenues increased 2.6 percent to $43.6 million in the first quarter of 2014 from $42.5 million in the first quarter of 2013. This increase in revenues was primarily due to volume increases partially offset by a decrease in net revenue margin, which was driven by market volatility and strong competition.


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Our air transportation net revenues increased 4.1 percent to $17.5 million in the first quarter of 2014 from $16.8 million in the first quarter of 2013. This increase was primarily due to volume increases and an increase in net revenue margin.
Our customs net revenues increased 8.4 percent to $9.3 million in the first quarter of 2014 from $8.6 million in 2013. This increase was primarily due to higher transaction volumes.
Other logistics services net revenues, which include transportation management services, warehousing, and small parcel, increased 8.0 percent to $18.6 million in the first quarter of 2014 from $17.2 million in the first quarter of 2013. This increase was driven by increases in both warehousing and management services.
Sourcing net revenues decreased 15.7 percent to $26.8 million in the first quarter of 2014 from $31.8 million in the first quarter of 2013. We continued to experience volume and net revenue declines from a large customer. We expect the revenue declines with this large customer to continue throughout 2014. Our net revenue margin decreased to 8.0 percent in the first quarter of 2014 from 8.2 percent in the first quarter of 2013. This decline was primarily due to weather, a lack of product availability with some key commodities, and market volatility. Payment Services net revenues decreased 4.3 percent to $2.5 million in the first quarter of 2014 from $2.6 million in the first quarter of 2013.
Operating expenses. Operating expenses increased 4.6 percent to $300.3 million in the first quarter of 2014 from $287.0 million in the first quarter of 2013. Operating expenses as a percentage of net revenues increased to 65.7 percent in the first quarter of 2014 from 63.0 percent in the first quarter of 2013. For the first quarter, personnel expenses increased 3.6 percent to $220.3 million in 2014 from $212.6 million in 2013. This was due to an increase in our average headcount of approximately six percent. The personnel expense increase 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.
For the first quarter, other selling, general, and administrative expenses increased 7.5 percent to $80.0 million in 2014 from $74.4 million in 2013. This was primarily driven by an increase of $4.0 million in our provision for bad debt in the first quarter of 2014 compared to the first quarter of 2013, primarily related to credit deterioration of two specific customers. Income from operations. Income from operations decreased 7.0 percent to $157.0 million in the first quarter of 2014 from $168.7 million in the first quarter of 2013. Income from operations as a percentage of net revenues decreased to 34.3 percent in the first quarter of 2014 from 37.0 percent in the first quarter of 2013.
Investment and other (expense) income. Investment and other (expense) income was an expense of $6.1 million in the first quarter of 2014 compared to an expense of $0.1 million in the first quarter of 2013. The change was due primarily to the interest expense related the long-term notes issued during the third quarter of 2013.
Provision for income taxes. Our effective income tax rate was 38.2 percent for the first quarter of 2014 and 37.9 percent for the first quarter of 2013. 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 decreased 9.8 percent to $93.2 million in the first quarter of 2014 from $103.3 million in the first quarter of 2013. Basic and diluted net income per share decreased 1.6 percent to $0.63 from $0.64 LIQUIDITY AND CAPITAL RESOURCES
We have historically generated substantial cash from operations, which has enabled us to fund our organic growth while paying cash dividends and repurchasing stock. During the fourth quarter of 2012, we entered into a senior unsecured revolving credit facility for up to $500 million with a $500 million accordion feature, of which $410.0 million was outstanding as of March 31, 2014. During the third quarter of 2013, we entered into a Note Purchase Agreement to fund the ASR Agreements to repurchase $500.0 million worth of our common stock. We 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 $142.8 million and $162.0 million as of March 31, 2014 and December 31, 2013. Cash and cash equivalents held outside the United States totaled $66.4 million and $80.2 million as of March 31, 2014 and December 31, 2013. Working capital at March 31, 2014 and December 31, 2013 was $442.6 million and $394.5 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.


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Cash flow from operating activities. We generated $14.4 million and used $58.1 million of cash flow from operations during the three months ended March 31, 2014 and 2013. During the three months ended March 31, 2014, our cash flow from operations increased $72.5 million compared to the three months ended three months ended March 31, 2013. 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 our former subsidiary T-Chek Systems, Inc ("T-Chek").
Cash used for investing activities. We used $12.3 million and $10.1 million of cash during the three months ended March 31, 2014 and 2013 for investing activities.
We used $12.6 million and $10.2 million for capital expenditures during the three months ended March 31, 2014 and 2013 primarily for investments in information technology equipment to support our operating systems, including the purchase and development of software. These information technology investments are intended to improve efficiencies and help grow the business. Additionally, we completed construction on a new office building on our corporate campus in Eden Prairie, Minnesota during the first quarter of 2014. This building replaced space we leased in Eden Prairie. Total capitalized value of the building was approximately $18.5 million.
Cash used for financing activities. We used $21.4 million and generated $18.6 million of cash flow for financing activities during the three months ended March 31, 2014 and 2013.
During the three months ended March 31, 2014, we had net short term borrowings of $35.0 million. The outstanding balance on the revolving credit facility was $410.0 million as of March 31, 2014. We were in compliance with all of the credit facility's debt covenants as of March 31, 2014.
We used $52.4 million and $56.5 million to pay cash dividends during the three months ended March 31, 2014 and 2013. The decrease in 2014 was due to a decrease in outstanding shares compared to 2013.
We used $11.0 million and $46.9 million to acquire shares from employees through their withholding taxes resulting from the delivery of restricted equity during the three months ended March 31, 2014 and 2013.
We used $2.0 million and $45.0 million on share repurchases during the three months ended March 31, 2014 and 2013. In August 2013, the Board of Directors increased the number of shares authorized to be repurchased by 15,000,000 shares. As of March 31, 2014, there were 12,795,442 shares remaining for future repurchases. The number of shares we repurchase, if any, during future periods will vary based on our cash position, potential uses of our cash, and market conditions.
Assuming no change in our current business plan, management believes that our available cash, together with expected future cash generated from operations, the amount available under our credit facility, and credit available in the market, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends in future periods. We also believe we could obtain funds under lines of credit or other forms of indebtedness on short notice, if needed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our condensed consolidated financial statements include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying condensed consolidated financial statements and related footnotes. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of our critical accounting policies and estimates.
Revenue recognition. Total revenues consist of the total dollar value of goods and services purchased from us by customers. Net revenues are total revenues less the direct costs of transportation, products, and handling. We act principally as the service provider for these transactions and recognize revenue as these services are rendered or goods are delivered. At that time, our obligations to the transactions are completed and collection of receivables is reasonably assured. Most transactions in our Transportation and Sourcing businesses are recorded at the gross amount we charge our customers for the service we provide and goods we sell. In these transactions, we are the primary obligor, we have credit risk, we have discretion to select the supplier, and we have latitude in pricing decisions. Additionally, in our Sourcing business, we often take loss of inventory risk during shipment and have general inventory risk.


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Certain transactions in customs brokerage, transportation management, and sourcing are recorded at the net amount we charge our customers for the service we provide because many of the factors stated above are not present. Valuations for accounts receivable. Our allowance for doubtful accounts is calculated based upon the aging of our receivables, our historical experience of . . .

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