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 ofthe 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 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. OVERVIEWC.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 inNorth America ,Europe ,Asia ,Oceania , andSouth 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. 20 -------------------------------------------------------------------------------- Table of Contents 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. 21 -------------------------------------------------------------------------------- Table of Contents 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. OnMarch 2, 2020 , we acquired all of the outstanding shares ofPrime Distribution Services ("Prime Distribution"), a leading provider of retail consolidation services inNorth 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 ofFebruary 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 sinceMarch 1, 2020 . SIGNIFICANT DEVELOPMENTS During the three and six months endedJune 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 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 ofJune 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 forU.S. and Canadian employees, accelerating the use of paid time off, and furloughing approximately seven percent of ourU.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 toJune 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. 22 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 30, 2020 . 23
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