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C H ROBINSON WORLDWIDE : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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, but are not limited to, changes in economic
conditions, including uncertain consumer demand; changes in market demand and
pressures on the pricing for our services; changes due to catastrophic events
including pandemics such as COVID-19; 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 United States; risks associated with the
potential impact of changes in government regulations; risks associated with the
produce industry, including food safety and contamination issues; fuel price
increases or decreases, or fuel shortages; cyber-security related risks; the
impact of war on the economy; changes to our capital structure; risks related to
the elimination of LIBOR; 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, 2019, filed with the Securities and
Exchange Commission on February 19, 2020 as well as the updates to these risk
factors included in Part II-"Item 1A, Risk Factors," herein.
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
C.H. Robinson Worldwide, Inc. ("C.H. Robinson," "the company," "we," "us," or
"our") is one of the largest third party logistics companies in the world. 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 arrange the transport of our customers'
freight. We provide freight transportation services and logistics solutions to
companies of all sizes, in a wide variety of industries. We operate through a
network of offices in North America, Europe, Asia, Oceania, and South America.
We have developed global transportation and distribution networks to provide
transportation and supply chain services worldwide. As a result, we have the
capability of facilitating most aspects of the supply chain on behalf of our
customers.
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Our net revenues are a non-GAAP financial measure calculated as total revenues
less the cost of purchased transportation and related services and the cost of
purchased products sourced for resale. We believe net revenues are a useful
measure of our ability to source, add value, and sell services and products that
are provided by third parties, and we consider net revenues to be our primary
performance measurement. Accordingly, the discussion of our results of
operations often focuses on the changes in our net revenues. The reconciliation
of total revenues to net revenues is presented below (in thousands):
                                                                                                                      Six Months Ended June
                                                         Three Months Ended June 30,                                           30,
                                                          2020                   2019                 2020                  2019
Revenues:
Transportation                                      $    3,348,611$ 3,638,612$ 6,890,729$   7,143,544
Sourcing                                                   279,235              270,228              542,125                516,506
Total revenues                                           3,627,846            3,908,840            7,432,854              7,660,050
Costs and expenses:
Purchased transportation and related services            2,762,590            2,972,998            5,762,703              5,826,254
Purchased products sourced for resale                      250,803              240,626              487,745                459,780
Total costs and expenses                                 3,013,393            3,213,624            6,250,448              6,286,034
Net revenues                                        $      614,453$   695,216$ 1,182,406$   1,374,016



MARKET TRENDS
The COVID-19 pandemic continued to impact the North American surface
transportation market, resulting in significant volatility to freight volumes
and carrier costs during the second quarter of 2020. Similar to the first
quarter of 2020, the impact on the market varied significantly depending on
industry vertical, customer size, and the severity of restrictions in place to
control the outbreak in the regions in which we operate. Certain industry
verticals, such as retail, continued to see the elevated demands similar to
those experienced near the end of the first quarter of 2020, while many other
industry verticals continued to experience demand and production well below
historical levels. The impact of reduced consumer demand and production resulted
in reduced carrier capacity, most notably in truckload, as many carriers either
reduced lanes or exited the market entirely, which caused significant volatility
in purchased transportation pricing. Industry freight volumes, as measured by
the Cass Freight Index, declined approximately 21 percent during the second
quarter of 2020 compared to the second quarter of 2019. One of the metrics we
use to measure market conditions is the truckload routing guide depth from our
Managed Services business. Routing guide depth represents the number of carriers
contacted prior to an acceptance when procuring a transportation provider. The
average routing guide depth of tender in the second quarter of 2020 was 1.2,
representing that on average, the first carrier in a shipper's routing guide was
executing the shipment in most cases. This route guide penetration continues to
be among the lowest levels we have experienced in the last decade.
The global forwarding market was also impacted by COVID-19 as reduced demand and
production resulted in decreased volumes in many of the regions in which we
operate. The airfreight market experienced significant pricing increases in the
second quarter of 2020 resulting from decline in capacity due to a reduction in
commercial flights, increased charter flights, and larger than normal shipment
sizes due to the COVID-19 pandemic. In addition, the ocean freight market
continued to be impacted by reduced demand and production similar to the end of
the first quarter of 2020 due to the ongoing COVID-19 pandemic. In response to
reduced demand and production many ocean carriers idled capacity to better align
with demand resulting in higher pricing and cost of transportation in the second
quarter of 2020.
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BUSINESS TRENDS
Our second quarter of 2020 results are largely consistent with the overall
market trends summarized above. We saw significant changes in pricing from our
truckload contracted carriers and reduced demand in nearly all of our service
lines within the second quarter of 2020. The impact on demand continued to be
impacted by industry vertical, customer size, and the regulations in place to
limit the spread of the COVID-19 pandemic. Despite industry freight volumes
declining approximately 21 percent, our NAST truckload and LTL volumes only
decreased 4.5 percent and 2.0 percent, respectively, which is reflective of our
pricing strategies to ensure we are near the top of our customers' routing
guides. We continued to meet our customer commitments despite significant cost
of transportation pricing volatility, which resulted in margin compression
during the second quarter of 2020. In our global forwarding business, we saw
significant increases to the price of airfreight which resulted in margin
expansion as we were able to leverage our contractual airfreight capacity
despite significant shortages in the airfreight market. The increase in
airfreight pricing more than offset a 35.5 percent decline in airfreight
volumes. The COVID-19 pandemic also contributed to an 8.5 percent decrease in
ocean volumes as many industries continued to experience demand and production
well below historical levels.
On March 2, 2020, we acquired all of the outstanding shares of Prime
Distribution Services ("Prime Distribution"), a leading provider of retail
consolidation services in North America for $222.7 million in cash. This
acquisition adds scale and value-added warehouse capabilities to our retail
consolidation platform, adding to our global suite of services. The acquisition
was effective as of February 29, 2020, and therefore the results of operations
of Prime Distribution have been included as part of the North American Surface
Transportation segment in our consolidated financial statements since March 1,
2020.
SIGNIFICANT DEVELOPMENTS
During the three and six months ended June 30, 2020, our financial results and
operations were impacted by the COVID-19 pandemic described above and discussed
throughout Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In addition, see Part II-"Item 1A, Risk Factors,"
included herein for an update to the risk factors described in "Item 1A, Risk
Factors," of our Annual Report on Form 10-K for the year ended December 31,
2019, filed with the Securities and Exchange Commission on February 19, 2020.
The extent to which the COVID-19 pandemic impacts our financial results and
operations for the remainder of 2020 and going forward will depend on future
developments which are highly uncertain and cannot be predicted, including
fluctuations in the severity of the outbreak and the actions being taken to
contain and treat it.
We have taken a variety of measures to ensure the availability, continuity, and
security of our critical infrastructure, ensure the health and safety of our
employees around the globe, and provide service and supply chain continuity to
our customers and contracted carriers in order to deliver critical and essential
goods and services. We continue to follow public and private sector policies and
initiatives to reduce the transmission of COVID-19, such as requiring social
distancing, wearing a mask, and limiting the number of employees to less than 50
percent capacity when in the office, in addition to the elimination of all
non-essential travel. We have also adopted work-from-home arrangements, and as
of June 30, 2020, nearly 90 percent of our employees were working remotely
executing their duties and responsibilities. We do not believe these policies
and initiatives will adversely impact our operations. In addition, we have taken
steps across the organization to reduce costs, including the elimination of all
non-essential travel, temporary salary reductions for company executive
officers, temporary reductions in cash retainers for board members, temporary
suspension of the company match to retirement plans for U.S. and Canadian
employees, accelerating the use of paid time off, and furloughing approximately
seven percent of our U.S and Canadian employees in the second quarter of 2020.
As we continue to harness the benefits of our technology investment and network
transformation, we have eliminated certain positions subsequent to June 30,
2020, and therefore, a portion of employees did not return from furlough. We
expect to recognize approximately $4.5 million in severance during the third
quarter of 2020 as a result of these reductions.
Due to the ongoing uncertainty around the severity and duration of the outbreak,
we are not able at this time to estimate the impact COVID-19 may have on our
financial results and operations for the remainder of 2020 and going forward.
However, the impact could be material in all business segments and could be
material during any future period affected either directly or indirectly by this
pandemic. Many businesses continue to experience reduced production and output
which could result in a decrease in freight volumes across a number of
industries which may reduce our contractual and spot-market opportunities. In
addition, a significant number of our contracted carriers may reduce their
capacity or charge higher prices in light of the volatile market conditions
which may reduce our net revenue margins as we honor our contractual freight
rates.
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SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following summarizes select second quarter 2020 year-over-year operating
comparisons to second quarter 2019:
•Total revenues decreased 7.2 percent to $3.6 billion, driven primarily by lower
pricing in truckload and less than truckload ("LTL") services.
•Net revenues decreased 11.6 percent to $614.5 million, primarily driven by
lower margin in truckload services.
•Personnel expenses decreased 11.3 percent to $300.5 million, driven primarily
by short-term cost reductions and declines in variable compensation. Average
headcount decreased 2.7 percent, with acquisitions contributing approximately
one percentage point of growth.
•Other selling, general, and administrative ("SG&A") expenses decreased 2.8
percent to $125.2 million. The largest contributor to the decrease was the
elimination of non-essential travel, partially offset by an $11.5 million loss
on the sale-leaseback of a company-owned data center.
•Income from operations totaled $188.8 million, down 17.0 percent from last year
due to declining net revenues.
•Operating margin of 30.7 percent decreased 200 basis points.
•Diluted earnings per share (EPS) decreased 13.1 percent to $1.06.
•Cash flow from operations increased 10.8 percent to $505.6 million during the
six months ended June 30, 2020.
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