CH ROBINSON WORLDWIDE, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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The following discussion of our financial condition and results of operations
should be read 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; fuel price increases or decreases, or
fuel shortages; competition and growth rates within the global 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; cyber-security
related risks; risks associated with operations outside of the United States;
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 related to the elimination of
LIBOR; risks associated with the potential impact of changes in government
regulations; risks associated with the produce industry, including food safety
and contamination issues; the impact of war on the economy; changes to our
capital structure; changes due to catastrophic events including pandemics such
as COVID-19, 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, 2020, filed with the Securities and Exchange Commission
on February 19, 2021 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 world's largest logistics platforms. Our mission is to
improve the world's supply chains through our people, processes, and technology
by delivering exceptional value to our customers and suppliers. 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 offer a global
suite of services using tailored, market-leading solutions built by and for
supply chain experts. Our global network of supply chain experts work with our
customers to drive better supply chain outcomes by leveraging our experience,
data, digital solutions, and scale.
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Our adjusted gross profit and adjusted gross profit margin are non-GAAP
financial measures. Adjusted gross profit is calculated as gross profit
excluding amortization of internally developed software utilized to directly
serve our customers and contracted carriers. Adjusted gross profit margin is
calculated as adjusted gross profit divided by total revenues. We believe
adjusted gross profit and adjusted gross profit margin are useful measures of
our ability to source, add value, and sell services and products that are
provided by third parties, and we consider adjusted gross profit to be a primary
performance measurement. Accordingly, the discussion of our results of
operations often focuses on the changes in our adjusted gross profit and
adjusted gross profit margin. The reconciliation of gross profit to adjusted
gross profit and gross profit margin to adjusted gross profit margin is
presented below (dollars in thousands):
                                                   Three Months Ended September 30,                                      Nine Months Ended September 30,
                                                 2021                              2020                               2021                                2020
Revenues:
Transportation                       $      5,999,901                    $ 3,944,981                    $     15,800,576                        $ 10,835,710
Sourcing                                      263,794                        279,819                             799,714                             821,944
Total revenues                              6,263,695                      4,224,800                          16,600,290                          11,657,654
Costs and expenses:
Purchased transportation and related
services                                    5,180,390                      3,378,651                          13,580,980                           

9,141,354

Purchased products sourced for
resale                                        239,113                        256,876                             723,562                             

744 621

Direct internally developed software
amortization                                    5,152                          4,388                              14,601                              12,124
Total direct costs                          5,424,655                      3,639,915                          14,319,143                           9,898,099
Gross profit / Gross profit margin            839,040      13.4  %           584,885      13.8  %              2,281,147          13.7  %          1,759,555      15.1  %
Plus: Direct internally developed
software amortization                           5,152                          4,388                              14,601                              

12,124

Adjusted gross profit / Adjusted
gross profit margin                  $        844,192      13.5  %       $   589,273      13.9  %       $      2,295,748          13.8  %       $  1,771,679      15.2  %



Our adjusted operating margin is a non-GAAP financial measure calculated as
operating income divided by adjusted gross profit. We believe adjusted operating
margin is a useful measure of our profitability in comparison to our adjusted
gross profit, which we consider a primary performance metric as discussed above.
The reconciliation of operating margin to adjusted operating margin is presented
below (dollars in thousands):
                                            Three Months Ended September 30,                 Nine Months Ended September 30,
                                                2021                    2020                    2021                    2020

Total revenues                          $      6,263,695           $ 4,224,800          $     16,600,290           $ 11,657,654
Operating income                                 310,769               168,239                   794,702                466,466
Operating margin                                     5.0   %               4.0  %                    4.8   %                4.0  %

Adjusted gross profit                   $        844,192           $   589,273          $      2,295,748           $  1,771,679
Operating income                                 310,769               168,239                   794,702                466,466
Adjusted operating margin                           36.8   %              28.6  %                   34.6   %               26.3  %


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MARKET TRENDS
The North American surface transportation market continues to be impacted by
tight carrier capacity as strong demand combined with ongoing driver
availability challenges and supply chain disruptions caused by port congestion
and weather events continue to drive purchased transportation costs to new
historic levels. Industry freight volumes, as measured by the Cass Freight
Index, increased approximately 9 percent during the third quarter of 2021
compared to the third quarter of 2020. This compares to an 8 percent decline for
the same index during the third quarter of 2020. 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 acceptance when procuring a transportation provider. The
average routing guide depth of tender in the third quarter of 2021 was 1.7,
representing that on average, the first or second carrier in a shipper's routing
guide was executing the shipment in most cases. This routing guide penetration
compares to 1.6 in the third quarter of 2020 and is reflective of the tight
carrier capacity in both the third quarter of 2021 and 2020.
The global forwarding market continues to be significantly impacted by supply
chain disruptions caused by ongoing port congestion along with equipment and
labor shortages. These disruptions combined with strong demand have continued to
drive purchased transportation costs for both ocean and air freight to historic
levels. Due to the unprecedented challenges in the ocean freight market,
conversions to air freight have become increasingly common. This has resulted in
a continued increase in charter flights and larger than normal shipment sizes as
traditional air freight capacity remains strained by a reduction of commercial
flights since the beginning of the COVID-19 pandemic.
BUSINESS TRENDS
Our third quarter of 2021 surface transportation results continue to be impacted
by the rising cost and price environment summarized in the market trends
section. We have not, however, experienced the significant year over year volume
volatility seen in the industry as measured by the Cass Freight Index. Industry
freight volumes increased approximately 9 percent during the third quarter of
2021 compared to an 8 percent decline during the third quarter of 2020. Our
combined NAST truckload and less than truckload ("LTL") volume increased 2.5
percent during the third quarter of 2021 compared to an 8.0 percent increase
during the third quarter of 2020. We have continued to work with our customers
to meet our contractual commitments since the beginning of the COVID-19 pandemic
which has resulted in a higher than normal percentage of shipments with negative
adjusted gross profit margins and less volatility in our combined NAST truckload
and LTL volumes as compared to the Cass Freight Index. We continue to reshape
our portfolio by adapting our pricing to reflect the rising cost environment and
participating to a greater extent in the spot market. The strong demand and
tight carrier capacity conditions resulted in our average truckload linehaul
cost per mile, excluding fuel costs, increasing 26.0 percent during the third
quarter of 2021. Our average truckload linehaul rate charged to our customers,
excluding fuel surcharges, increased approximately 27.0 percent during the third
quarter of 2021.
In our global forwarding business, we continued to experience significant
increases in purchased transportation costs for both ocean and air freight due
to port congestion in addition to the equipment and labor shortages impacting
the global forwarding market. This along with increased volumes has resulted in
strong growth in both total revenue and cost of transportation for our ocean and
air freight services. Ocean volumes increased 12.0 percent with strong growth in
nearly all regions we serve driven by higher award sizes from existing customers
and new customer growth. In addition, we experienced strong growth in our air
freight services driven by ocean freight conversions resulting from the
significant disruptions experienced in the industry.
On June 3, 2021, we acquired Combinex Holding B.V. ("Combinex") to further
expand our European road transportation presence. Our consolidated results
include the results of Combinex as of June 3, 2021. 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 NAST segment in our consolidated financial statements since March
1, 2020.
SIGNIFICANT DEVELOPMENTS
During the three months ended September 30, 2021, our financial results and
operations were impacted by the COVID-19 pandemic and supply chain disruptions
impacting the global forwarding and surface transportation markets as described
above and discussed throughout Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The extent to which the COVID-19
pandemic and supply chain disruptions impact our financial results and
operations for the remainder of 2021 and going forward will depend on future
developments which are highly uncertain and cannot be predicted, including
fluctuations in the severity of the COVID-19 outbreak and the actions being
taken to contain and treat it in addition to actions being taken to resolve
issues facing supply chains around the globe.
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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 have also adopted work-from-home arrangements, and as of
September 30, 2021, approximately 80 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.
Due to the ongoing uncertainty around the severity and duration of the outbreak,
including the emergence of COVID-19 variants, 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 2021 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 have
experienced, and may continue to experience, reduced production and output which
has resulted, and could continue to result, in a decrease in freight volumes
across a number of industries, reducing our contractual and spot-market
opportunities. In addition, a significant number of our contracted carriers have
reduced, and may continue to reduce, their capacity or charge higher prices in
light of the volatile market conditions which has reduced and may continue to
reduce our adjusted gross profit margins as we honor our contractual freight
rates.
SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following summarizes select third quarter 2021 year-over-year operating
comparisons to the third quarter 2020:
•Total revenues increased 48.3 percent to $6.3 billion, driven primarily by
higher pricing and higher volume across most of our services.
•Gross profits increased 43.5 percent to $839.0 million. Adjusted gross profits
increased 43.3 percent to $844.2 million, primarily driven by higher adjusted
gross profit per transaction and higher volume across most of our services.
•Personnel expenses increased 32.0 percent to $399.9 million, primarily due to
higher incentive compensation costs and also due to the benefit realized in the
third quarter of 2020 from our short-term, pandemic-related cost reductions.
Average headcount increased 7.1 percent.
•Other selling, general, and administrative ("SG&A") expenses increased 13.0
percent to $133.5 million, primarily due to the benefit realized in the third
quarter of 2020 from our short-term, pandemic-related cost reductions.
•Income from operations totaled $310.8 million, up 84.7 percent due to the
increase in adjusted gross profits.
•Adjusted operating margin of 36.8 percent increased 820 basis points.
•Interest and other expenses totaled $16.7 million, consisting primarily of
$13.1 million of interest expense, which increased $1.2 million versus last year
due to a higher average debt balance. The third quarter also included a
$3.8 million unfavorable impact from foreign currency revaluation and realized
foreign currency gains and losses.
•The effective tax rate in the quarter was 16.0 percent compared to 15.1 percent
in the third quarter last year. The rate increase was due primarily to a lower
tax benefit related to stock-based compensation.
•Diluted earnings per share (EPS) increased 85.0 percent to $1.85.
•Cash flow from operations decreased $317.9 million driven by a large increase
in working capital as of September 30, 2021.
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