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):
                                                       Three Months Ended September 30,                 Nine Months Ended September 30,
                                                           2020                    2019                    2020                    2019
Revenues:
Transportation                                     $       3,944,981          $ 3,608,346          $      10,835,710          $ 10,751,890
Sourcing                                                     279,819              247,786                    821,944               764,292
Total revenues                                             4,224,800            3,856,132                 11,657,654            11,516,182
Costs and expenses:
Purchased transportation and related services              3,378,651            2,999,979                  9,141,354             8,826,233
Purchased products sourced for resale                        256,876              222,722                    744,621               682,502
Total costs and expenses                                   3,635,527            3,222,701                  9,885,975             9,508,735
Net revenues                                       $         589,273          $   633,431          $       1,771,679          $  2,007,447



MARKET TRENDS
The North American surface transportation market experienced increasing
sequential demand during the third quarter of 2020 despite many small to
mid-sized companies and certain industries continuing to experience demand below
historical levels due to the COVID-19 pandemic. The improving demand during the
third quarter of 2020 was most pronounced with large companies and from the
retail and food and beverage industries. The impact of increasing consumer
demand and production resulted in tighter carrier capacity and led to an
increase in purchased transportation pricing. Industry freight volumes, as
measured by the Cass Freight Index, declined approximately 8 percent during the
third quarter of 2020 compared to the third quarter of 2019 although they did
increase sequentially 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 an acceptance when procuring a transportation provider. The
average routing guide depth of tender in the third quarter of 2020 was 1.6,
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 1.2 in both the first and second quarters of 2020 and is reflective
of the increasing consumer demand and production and the tightening carrier
capacity evident in the third quarter of 2020. This caused routing guides to
rapidly degrade and more loads to move to the spot market driving sharp
increases in transportation costs.
The global forwarding market also showed signs of improvement during the third
quarter of 2020 after multiple quarters of reduced demand and production
resulting in decreased volumes due to the COVID-19 pandemic. Many companies
began to replenish low inventory levels amidst continued market uncertainty from
the COVID-19 pandemic. Both the airfreight and ocean market experienced
significant pricing increases in the third quarter of 2020 compared to the third
quarter of 2019 resulting from reduced capacity. In the airfreight market, a
reduction in commercial flights resulted in an increase in charter flights and
larger than normal shipment sizes due to the COVID-19 pandemic. In the ocean
freight market, sequential demand accelerated faster than carrier capacity
returned to the market, resulting in significant pricing increases.
BUSINESS TRENDS
Our third quarter of 2020 surface transportation results are largely consistent
with the overall market trends summarized above, although we did experience
volume increases in excess of the industry trends as measured by the Cass
Freight Index. Despite industry freight volumes declining approximately 8
percent, our NAST truckload and LTL volumes increased 0.5 percent and 13.5
percent, respectively, which is reflective of our pricing strategies to ensure
we are near the top of our customers' routing guides. We continued to work with
our customers to meet our contractual commitments during the third quarter of
2020 while adapting our pricing to reflect the volatile cost of transportation
pricing seen since the beginning of the COVID-19 pandemic while also serving
customers' needs in the spot market. This resulted in an increase in average
truckload linehaul rates per mile, excluding fuel costs, charged to customers
although our truckload transportation costs, excluding fuel prices, increased at
a faster rate resulting in margin compression.

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In our global forwarding business, we continued to experience significant
increases to the price of airfreight due to significant capacity shortages in
the airfreight market. These shortages were caused by a reduction in commercial
flights, which have resulted in an increase in charter flights and larger than
normal shipment sizes. The increase in airfreight pricing more than offset a
19.0 percent decline in airfreight volumes. Ocean volumes increased 1.5 percent
as many industries resumed or increased production. In addition, the
accelerating sequential demand for ocean freight grew at a faster rate than
ocean carrier capacity, which resulted in significantly higher pricing in the
third quarter of 2020.
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 nine months ended September 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 September 30, 2020, over 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. 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 during the third quarter of
2020, and therefore, a portion of employees did not return from furlough. We
recognized $4.4 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.
SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following summarizes select third quarter 2020 year-over-year operating
comparisons to third quarter 2019:
•Total revenues increased 9.6 percent to $4.2 billion, driven primarily by
higher pricing in most service lines, most notably in ocean and airfreight
services, and higher volumes across most of our service lines.
•Net revenues decreased 7.0 percent to $589.3 million, primarily driven by
rising costs and lower margin in truckload services, partially offset by
contributions from the acquisition of Prime Distribution and higher pricing in
most of our service lines.
•Personnel expenses decreased 5.5 percent to $302.9 million, driven primarily by
cost reductions. Average headcount decreased 5.6 percent, despite the Prime
acquisition contributing approximately two percentage points of growth.
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•Other selling, general, and administrative ("SG&A") expenses increased 5.7
percent to $118.1 million due to the acquisition of Prime Distribution and the
prior year period benefiting from a $5.8 million gain on the sale of a facility
in Chicago, Illinois. These increases more than offset declines resulting from
cost reductions including the elimination of all non-essential travel.
•Income from operations totaled $168.2 million, down 16.3 percent due to
declining net revenues.
•Operating margin of 28.6 percent decreased 310 basis points.
•The effective tax rate in the quarter was 15.1 percent compared to 21.8 percent
in the third quarter last year. The lower effective tax rate was due primarily
to discrete benefits from foreign tax credit utilization and additional
deductions from increased employee stock option activity in the third quarter of
2020.
•Diluted earnings per share (EPS) decreased 6.5 percent to $1.00.
•Cash flow from operations decreased 46.0 percent to $337.0 million during the
nine months ended September 30, 2020.

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