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. 19 -------------------------------------------------------------------------------- Table of Contents 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. 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Transportation$ 5,240,448 $ 3,348,611 $ 9,800,675 $ 6,890,729 Sourcing 292,278 279,235 535,920 542,125 Total revenues 5,532,726 3,627,846 10,336,595 7,432,854 Costs and expenses: Purchased transportation and related services 4,519,305 2,762,590 8,400,590 5,762,703 Purchased products sourced for resale 264,245 250,803 484,449 487,745 Direct internally developed software amortization 4,802 3,991 9,449 7,736 Total direct costs 4,788,352 3,017,384 8,894,488 6,258,184 Gross profit / Gross profit margin 744,374 13.5 % 610,462 16.8 % 1,442,107 14.0 % 1,174,670 15.8 % Plus: Direct internally developed software amortization 4,802 3,991 9,449 7,736 Adjusted gross profit / Adjusted gross profit margin$ 749,176 13.5 %$ 614,453 16.9 %$ 1,451,556 14.0 %$ 1,182,406 15.9 % 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Total revenues$ 5,532,726 $ 3,627,846 $ 10,336,595 $ 7,432,854 Operating income 260,604 188,787 483,933 298,227 Operating margin 4.7 % 5.2 % 4.7 % 4.0 % Adjusted gross profit$ 749,176 $ 614,453 $ 1,451,556 $ 1,182,406 Operating income 260,604 188,787 483,933 298,227 Adjusted operating margin 34.8 % 30.7 % 33.3 % 25.2 % 20
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MARKET TRENDS
The North American surface transportation market continues to be impacted by
tight carrier capacity due to driver availability challenges and strong demand
resulting in historically high pricing for purchased transportation. Industry
freight volumes, as measured by the Cass Freight Index, increased approximately
30 percent during the second quarter of 2021 compared to the second quarter of
2020. The second quarter of 2020 was significantly impacted by the COVID-19
pandemic and restrictions in place to control the outbreak which drove down
industry freight volumes by approximately 21 percent in the prior year. 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 second 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 1.2 in the second quarter of 2020 and is
reflective of the tight carrier capacity in the second quarter of 2021. As
capacity continues to tighten and routing guides continue to degrade more loads
move to the spot market driving sharp increases in purchased transportation
costs.
The global forwarding market continues to experience strong demand which is
outpacing supply in addition to unprecedented disruptions due to port congestion
and shipping container shortages. These disruptions combined with strong demand
across most industries, most notably retail, have resulted in significant
increases in purchased transportation costs for both ocean and air freight. Due
to the unprecedented challenges in the ocean freight market conversions to air
freight have become increasingly common. This 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 second quarter of 2021 surface transportation results are largely consistent
with the overall market trends summarized above, although our volume changes did
not experience the significant volatility seen in the industry as measured by
the Cass Freight Index. Industry freight volumes increased approximately 30
percent compared to a 21 percent decline in the second quarter of 2020. Our
combined NAST truckload and less than truckload ("LTL") volume increase of 16.0
percent compared to a 3.0 percent decrease in the second 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 47.5 percent in the second quarter of 2021. Our average
truckload linehaul rate charged to our customers, excluding fuel surcharges,
increased approximately 42.0 percent in the second 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 the disruptions and capacity 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 29.0 percent with strong growth in all regions we serve
driven by higher award sizes from existing customers, new customer growth, and
the adverse impact of the COVID-19 pandemic on the second quarter of 2020
results. 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 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 . 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 .
SIGNIFICANT DEVELOPMENTS
During the three months ended June 30, 2021 , 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." The extent to which the COVID-19 pandemic impacts
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 outbreak and the
actions being taken to contain and treat it.
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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
June 30, 2021 , over 60 percent of our employees were working remotely executing
their duties and responsibilities although many of our employees began returning
to our physical offices under a more flexible work model in July 2021 . 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 second quarter 2021 year-over-year operating
comparisons to the second quarter 2020:
•Total revenues increased 52.5 percent to $5.5 billion , driven primarily by
higher pricing and higher volume across most of our services.
•Gross profits increased 21.9 percent to $744.4 million . Adjusted gross profits
increased 21.9 percent to $749.2 million , primarily driven by higher volume in
our ocean, truckload, LTL and air services and higher adjusted gross profit per
shipment in our ocean and truckload services.
•Personnel expenses increased 20.8 percent to $362.9 million , primarily driven
by higher incentive compensation costs and also due to the benefit realized in
the second quarter of 2020 from our short-term cost reduction initiatives.
Average headcount increased 0.7 percent.
•Other selling, general, and administrative ("SG&A") expenses increased 0.4
percent to $125.7 million .
•Income from operations totaled $260.6 million , up 38.0 percent due to the
increase in adjusted gross profits.
•Adjusted operating margin of 34.8 percent increased 410 basis points.
•Interest and other expenses totaled $13.5 million , consisting primarily of
$12.7 million of interest expense, which increased $0.4 million versus last year
due to a higher average debt balance. The second quarter also included a
$1.9 million unfavorable impact from foreign currency revaluation and realized
foreign currency gains and losses.
•The effective tax rate in the quarter was 21.6 percent compared to 19.4 percent
in the second quarter last year. The rate increase was due primarily to a tax
benefit in the second quarter of 2020 from delivery of a one-time deferred stock
award that was granted to the company's prior Chief Executive Officer in 2000.
•Diluted earnings per share (EPS) increased 35.8 percent to $1.44 .
•Cash flow from operations decreased $413.0 million driven by a large increase
in working capital during the six months ended June 30, 2021 .
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