C.H. ROBINSON WORLDWIDE, INC. 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 ofthe 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 endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 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. OVERVIEWC.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 inNorth America ,Europe ,Asia ,Oceania , andSouth 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. 20 -------------------------------------------------------------------------------- Table of Contents 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 % 21 -------------------------------------------------------------------------------- Table of Contents 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. OnJune 3, 2021 , we acquiredCombinex Holding B.V. ("Combinex") to further expand our European road transportation presence. Our consolidated results include the results of Combinex as ofJune 3, 2021 . 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 NAST segment in our consolidated financial statements sinceMarch 1, 2020 . SIGNIFICANT DEVELOPMENTS During the three months endedSeptember 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. 22 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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 ofSeptember 30, 2021 . 23
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