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CHRW > SEC Filings for CHRW > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for C H ROBINSON WORLDWIDE INC

Form 10-Q for C H ROBINSON WORLDWIDE INC


11-Aug-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, or for other reasons; 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 declined by 31 employees between December 31, 2013 and June 30, 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. We have also issued restricted equity awards that vest evenly over five years.
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 June 30,                Six Months Ended June 30,
                     2014           2013       % change        2014           2013       % change
Transportation   $ 3,038,923    $ 2,818,077       7.8  %   $ 5,842,627    $ 5,421,259       7.8  %
Sourcing             460,816        466,811      (1.3 )%       796,624        854,663      (6.8 )%
Payment Services       3,179          3,374      (5.8 )%         6,252          6,607      (5.4 )%
Total            $ 3,502,918    $ 3,288,262       6.5  %   $ 6,645,503    $ 6,282,529       5.8  %

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

                   Three Months Ended June 30,        Six Months Ended June 30,
                      2014              2013            2014              2013
Transportation         15.9 %             15.3 %         15.6 %             15.7 %
Sourcing                7.6 %              8.3 %          7.8 %              8.3 %
Payment Services       81.5 %             80.2 %         81.6 %             80.7 %
Total                  14.9 %             14.4 %         14.7 %             14.8 %

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

                              Three Months Ended June 30,             Six Months Ended June 30,
                             2014          2013      % change       2014         2013      % change
Transportation
Truckload                $   305,561    $ 264,335      15.6  %   $ 575,398    $ 532,939       8.0  %
LTL (1)                       67,376       60,711      11.0  %     127,514      119,202       7.0  %
Intermodal                    10,863        9,920       9.5  %      19,803       19,021       4.1  %
Ocean                         50,486       49,124       2.8  %      94,098       91,612       2.7  %
Air                           21,747       20,202       7.6  %      39,201       36,970       6.0  %
Customs                       10,312        9,769       5.6  %      19,644       18,375       6.9  %
Other Logistics Services      17,207       17,084       0.7  %      35,773       34,278       4.4  %
Total Transportation         483,552      431,145      12.2  %     911,431      852,397       6.9  %
Sourcing                      34,894       38,752     (10.0 )%      61,740       70,598     (12.5 )%
Payment Services               2,591        2,705      (4.2 )%       5,101        5,329      (4.3 )%
Total                    $   521,037    $ 472,602      10.2  %   $ 978,272    $ 928,324       5.4  %

(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 June 30,        Six Months Ended June 30,
                                              2014              2013             2014             2013
Net revenues                                 100.0  %          100.0  %         100.0  %          100.0  %
Operating expenses:
Personnel expenses                            45.9  %           43.6  %          46.9  %           45.1  %
Other selling, general, and
administrative expenses                       15.6  %           17.8  %          16.5  %           17.1  %
Total operating expenses                      61.5  %           61.4  %          63.5  %           62.2  %
Income from operations                        38.5  %           38.6  %          36.5  %           37.8  %
Investment and other (expense) income         (1.2 )%           (0.1 )%          (1.3 )%           (0.1 )%
Income before provision for income taxes      37.3  %           38.5  %          35.3  %           37.8  %
Provision for income taxes                    14.5  %           14.8  %          13.6  %           14.6  %
Net income                                    22.8  %           23.7  %          21.6  %           23.2  %

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Total revenues and direct costs. Our consolidated total revenues increased 6.5 percent in the second quarter of 2014 compared to the second quarter of 2013. Total Transportation revenues increased 7.8 percent to $3.0 billion in the second quarter of 2014 from $2.8 billion in the second 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 7.1 percent in the second quarter of 2014 to $2.6 billion from $2.4 billion in the second quarter of 2013. This increase was due to higher transportation costs and higher volumes in many of our transportation modes. Our Sourcing revenue decreased 1.3 percent to $460.8 million in the second quarter of 2014 from $466.8 million in the second quarter of 2013. Purchased products sourced for resale decreased 0.5 percent in the second quarter of 2014 to $425.9 million from $428.1 million in the second quarter of 2013. These decreases were primarily due to volume and revenue decreases from a large customer. Our Payment Services revenue decreased 5.8 percent to $3.2 million in the second quarter of 2014 from $3.4 million in the second quarter of 2013.
Net revenues. Total Transportation net revenues increased 12.2 percent to $483.6 million in the second quarter of 2014 from $431.1 million in the second quarter of 2013. Our Transportation net revenue margin increased to 15.9 percent in the second quarter of 2014 from 15.3 percent in the second quarter of 2013. Our truckload net revenues increased 15.6 percent to $305.6 million in the second quarter of 2014 from $264.3 million in the second quarter of 2013; 95 percent of these revenues are derived from North America. Truckload volumes increased approximately four percent in the second quarter of 2014 compared to the second quarter of 2013. Our North American truckload volumes increased approximately three percent in the second quarter of 2014 compared to the second quarter of 2013. Truckload net revenue margin increased in the second quarter of 2014 compared to the second quarter of 2013, due primarily to increased rate 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 ten percent in the second quarter of 2014 compared to the second quarter of 2013. In North America, our truckload transportation costs increased approximately nine percent, excluding the estimated impacts of the change in fuel. These increases were largely the result of a change in the mix of our business, with higher growth in shorter-length haul freight compared to other types of truckload business. In general, a shorter length of haul invites higher customer rates and transportation costs per mile.
Our LTL net revenues increased 11.0 percent to $67.4 million in the second quarter of 2014 from $60.7 million in the second quarter of 2013. The increase was driven by an eight percent increase in total shipments and a slight increase in net revenue margin. This increase was partially the result of growth in the average size of LTL shipments, as well as a small increase in the length of haul for LTL shipments.
Our intermodal net revenue increased 9.5 percent to $10.9 million in the second quarter of 2014 from $9.9 million in the second quarter of 2013. This was primarily due to improved purchased transportation costs, a change in business mix, and a volume increase of one percent. Intermodal volumes were adversely impacted by railroad service levels.
Our ocean transportation net revenues increased 2.8 percent to $50.5 million in the second quarter of 2014 from $49.1 million in the second quarter of 2013. This increase in net revenues was primarily due to volume increases partially offset by a decrease in net revenue margin, due to excess capacity in the market.


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Our air transportation net revenues increased 7.6 percent to $21.7 million in the second quarter of 2014 from $20.2 million in the second quarter of 2013. This increase was primarily due to volume increases and an increase in net revenue margin.
Our customs net revenues increased 5.6 percent to $10.3 million in the second quarter of 2014 from $9.8 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 0.7 percent to $17.2 million in the second quarter of 2014 from $17.1 million in the second quarter of 2013. This increase was driven by increases in transportation management services, partially offset by declines in other logistics services.
Sourcing net revenues decreased 10.0 percent to $34.9 million in the second quarter of 2014 from $38.8 million in the second 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. Volumes were also negatively impacted by the drought conditions in the U.S. West Coast. Our net revenue margin decreased to 7.6 percent in the second quarter of 2014 from 8.3 percent in the second quarter of 2013.
Payment Services net revenues decreased 4.2 percent to $2.6 million in the second quarter of 2014 from $2.7 million in the second quarter of 2013. Operating expenses. Operating expenses increased 10.5 percent to $320.7 million in the second quarter of 2014 from $290.1 million in the second quarter of 2013. Operating expenses as a percentage of net revenues increased slightly to 61.5 percent in the second quarter of 2014 from 61.4 percent in the second quarter of 2013.
For the second quarter, personnel expenses increased 16.0 percent to $239.0 million in 2014 from $206.0 million in 2013. This was primarily due to increases in expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability and an increase in our average headcount of approximately four percent during the second quarter of 2014 compared to the second quarter of 2013.
For the second quarter, other selling, general, and administrative expenses decreased 2.9 percent to $81.7 million in 2014 from $84.1 million in 2013. This was due to a decrease in claims and travel expenses, partially offset by an increase in the provision for doubtful accounts related primarily to our increase in accounts receivable. In the second quarter of 2013, we recorded a $5.0 million charge related to the settlement of a contingent auto liability claim.
Income from operations. Income from operations increased 9.8 percent to $200.4 million in the second quarter of 2014 from $182.5 million in the second quarter of 2013. Income from operations as a percentage of net revenues decreased slightly to 38.5 percent in the second quarter of 2014 from 38.6 percent in the second quarter of 2013.
Interest and other expense. Interest and other expense was an expense of $6.3 million in the second quarter of 2014 compared to an expense of $0.6 million in the second 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 38.9 percent for the second quarter of 2014 and 38.5 percent 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 increased 6.0 percent to $118.6 million in the second quarter of 2014 from $111.9 million in the second quarter of 2013. Basic and diluted net income per share increased 14.3 percent to $0.80 from $0.70. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Total revenues and direct costs. Our consolidated total revenues increased 5.8 percent in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Total Transportation revenues increased 7.8 percent to $5.8 billion in the six months ended June 30, 2014 from $5.4 billion in the six months ended June 30, 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 7.9 percent in the six months ended June 30, 2014 to $4.9 billion from $4.6 billion in the six months ended June 30, 2013. This increase was due to higher transportation costs and higher volumes in many of our transportation modes. Our Sourcing revenue decreased 6.8 percent to $796.6 million in the six months ended June 30, 2014 from $854.7 million in the six months ended June 30, 2013. Purchased products sourced for resale decreased 6.3 percent in the six months ended June 30, 2014 to $734.9 million from $784.1 million in the six months ended June 30, 2013. These decreases were primarily due to volume and revenue decreases from a large customer. Our Payment Services revenue decreased 5.4 percent to $6.3 million in the six months ended June 30, 2014 from $6.6 million in the six months ended June 30, 2013.


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Net revenues. Total Transportation net revenues increased 6.9 percent to $911.4 million in the six months ended June 30, 2014 from $852.4 million in the six months ended June 30, 2013. Our Transportation net revenue margin decreased to 15.6 percent in the six months ended June 30, 2014 from 15.7 percent in the six months ended June 30, 2013.
Our truckload net revenues increased 8.0 percent to $575.4 million in the six months ended June 30, 2014 from $532.9 million in the six months ended June 30, 2013; 95 percent of these revenues are derived from North America. Truckload volumes increased approximately four percent in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Our North American truckload volumes increased approximately three percent. Truckload net revenue margin decreased in the six months ended June 30, 2014 compared to the six months ended June 30, 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 six months ended June 30, 2014 compared to the six months ended June 30, 2013. In North America, our truckload transportation costs increased approximately 11 percent, excluding the estimated impacts of the change in fuel. These increases were largely the result of a change in the mix of our business, with higher growth in shorter-length haul freight compared to other types of truckload business. In general, a shorter length of haul invites higher customer rates and transportation costs per mile.
Our LTL net revenues increased 7.0 percent to $127.5 million in the six months ended June 30, 2014 from $119.2 million in the six months ended June 30, 2013. The increase in net revenues was driven by an increase in total shipments of approximately eight percent, partially offset by decreased net revenue margin. LTL net revenue margin decreased in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to carrier price increases. Our intermodal net revenue increased 4.1 percent to $19.8 million in the six months ended June 30, 2014 from $19.0 million in the six months ended June 30, 2013. This was primarily due to improved improved customer pricing and purchased transportation costs, and a change in business mix, partially offset by volume declines.
Our ocean transportation net revenues increased 2.7 percent to $94.1 million in the six months ended June 30, 2014 from $91.6 million in the six months ended June 30, 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.
Our air transportation net revenues increased 6.0 percent to $39.2 million in the six months ended June 30, 2014 from $37.0 million in the six months ended June 30, 2013. This increase was primarily due to volume increases and an increase in net revenue margin.
Our customs net revenues increased 6.9 percent to $19.6 million in the six months ended June 30, 2014 from $18.4 million in June 30, 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 4.4 percent to $35.8 million in the six months ended June 30, 2014 from $34.3 million in the six months ended June 30, 2013. This increase was driven by increases in transportation management services, partially offset by declines in other logistics services. Sourcing net revenues decreased 12.5 percent to $61.7 million in the six months ended June 30, 2014 from $70.6 million in the six months ended June 30, 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. Sourcing volumes were also negatively impacted by the drought conditions in the U.S. West Coast. Our net revenue margin decreased to 7.8 percent in the six months ended June 30, 2014 from 8.3 percent in the six months ended June 30, 2013.
Payment Services net revenues decreased 4.3 percent to $5.1 million in the six months ended June 30, 2014 from $5.3 million in the six months ended June 30, 2013.
Operating expenses. Operating expenses increased 7.6 percent to $620.9 million in the six months ended June 30, 2014 from $577.1 million in the six months ended June 30, 2013. Operating expenses as a percentage of net revenues . . .

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