What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-31 · 132 added, 174 removed, 181 unchanged (63% of the section changed)

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The reconciliation of total revenues to net revenues is presented below (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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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.

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 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.

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 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.

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.

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.

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.

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.

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SIGNIFICANT DEVELOPMENTS

During the three and six months ended June 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.

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.

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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 June 30, 2020, nearly 90 percent of our employees were working remotely executing their duties and responsibilities.

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.

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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 subsequent to June 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.

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.

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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.

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.

• 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 increased 10.8 percent to $505.6 million during the six months ended June 30, 2020.

• Cash flow from operations decreased 46.0 percent to $337.0 million during the nine months ended September 30, 2020.

CONSOLIDATED RESULTS OF OPERATIONS

The following table summarizes our results of operations (dollars in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 % change 2020 2019 % change

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A reconciliation of our reportable segments to our consolidated results can be found in Note 9, Segment Reporting, in Part I, Financial Information of this Quarterly Report on Form 10-Q.

Consolidated Results of Operations—Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Consolidated Results of Operations—Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Total revenues and direct costs.

Total transportation revenues decreased, driven by the impact of the COVID-19 pandemic as discussed above.

This resulted in decreased pricing in truckload and LTL services in addition to lower volumes in most service lines, most notably truckload, ocean and airfreight.

These decreases were partially offset by a significant increase in airfreight pricing.

Total purchased transportation and related services experienced significant intraperiod volatility and ultimately decreased primarily due to decreased cost of capacity in truckload and LTL in addition to lower volumes.

Total transportation revenues increased, driven by increased pricing in the ocean, airfreight and truckload service lines in addition to increased volumes across most service lines.

These increases were partially offset by decreased pricing in LTL services and a decrease in airfreight volumes.

Total purchased transportation and related services increased, driven by higher average truckload linehaul costs per mile and higher costs of capacity in the ocean and airfreight service lines, in addition to higher volumes across most service lines, most notably in LTL services.

Our sourcing total revenue and purchased products sourced for resale increased due to higher pricing and costs per case, partially offset by lower case volume.

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Net revenues.

Our transportation net revenue margin decreased due to lower margins in truckload, and to a lesser extent LTL services, partially offset by a significant increase in airfreight margins.

Truckload and LTL margins declined in the second quarter of 2020 due to the significant transportation cost volatility experienced relative to our contractual customer pricing as we continued to meet our customer commitments despite moderating declines or, in some instances, increases for the cost of capacity.

Airfreight margins expanded driven by increased pricing as we were able to leverage our contractual airfreight capacity despite significant shortages in the airfreight market.

Sourcing net revenue margin declined due to a decrease in net revenue per case.

Our transportation net revenue decreased due to lower margins in truckload, and to a lesser extent LTL services, partially offset by an increase in airfreight and ocean margins driven by increased pricing.

Truckload and LTL margins declined in the third quarter of 2020 as we continued to meet our customer commitments despite increases for the cost of capacity.

Airfreight margins expanded driven by increased pricing caused by significant capacity shortages in the airfreight market due to a reduction in commercial flights resulting in an increase in charter flights and larger than normal shipment sizes.

Sourcing net revenue declined due to a decrease in net revenue per case and lower case volumes.

Operating expenses.

Personnel expenses decreased primarily due to short-term cost reductions, including furloughs and reduced work hours, in addition to declines in healthcare costs, and performance-based compensation.

Average headcount decreased 2.7 percent, despite acquisitions contributing approximately one percentage point of growth.

SG&A expenses decreased due to the elimination of non-essential travel, partially offset by an $11.5 million loss on the sale-leaseback of a company-owned data center.

Personnel expenses decreased primarily due to short-term cost reductions, including the temporary suspension of retirement matching contributions for North American employees, furloughs and reduced work hours.

Average headcount decreased 5.6 percent, despite acquisitions contributing approximately 2.0 percentage points of growth.

SG&A expenses increased due to increased customer credit losses 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 short-term cost reductions including the elimination of all non-essential travel.

Interest and other expense.

Interest and other expense primarily consisted of interest expense of $12.4 million in the second quarter of 2020, partially offset by a $1.8 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Interest expense decreased modestly driven by lower average interest rates in the second quarter of 2020 compared to the second quarter of 2019.

The second quarter of 2019 included a $2.9 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Interest and other expense primarily consisted of interest expense of $11.9 million in the third quarter of 2020, partially offset by a $3.3 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Interest expense decreased driven by a lower average debt balance in the third quarter of 2020 compared to the third quarter of 2019.

The third quarter of 2019 included a $1.1 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Provision for income taxes.

Our effective income tax rate was 19.4 percent for the second quarter of 2020 compared to 23.4 percent for the second quarter of 2019.

The effective income tax rate for the second quarter of June 30, 2020, was lower than the statutory federal income tax rate primarily due to the tax impact of share-based payment awards, including the tax benefit from the delivery of a one-time deferred stock award that was granted to the company's prior Chief Executive Officer in 2000, which reduced the effective tax rate by 4.5 percentage points, and foreign tax impacts recorded in the second quarter of June 30, 2020.

The effective income tax rate for the second quarter of 2019 was higher than the statutory federal income tax rate due to state income taxes, net of federal benefit, and foreign income taxes, but was partially offset by the tax impact of share-based payment awards.

Consolidated Results of Operations—Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Our effective income tax rate was 15.1 percent for the third quarter of 2020 compared to 21.8 percent for the third quarter of 2019.

The effective income tax rate for the third quarter ended September 30, 2020, was lower than the statutory federal i ncome tax rate primarily due to foreign tax impacts and the tax impact of share-based payment awards, which reduced the effective tax rate by 5.2 percentage points and 3.8 percentage points, respectively.

The effective income tax rate for the third quarter of 2019 was higher than the statutory federal income tax rate due to state income taxes, net of federal benefit, and foreign income taxes, but was partially offset by the tax impact of share-based payment awards and the combined tax impact of Global Intangible Low-tax Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”).

Consolidated Results of Operations—Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Total revenues and direct costs.

Total transportation revenues decreased driven by the impact of the COVID-19 pandemic which resulted in slowdowns of demand and production in many industry verticals and resulted in lower pricing in truckload and, to a lesser extent, LTL services.

These decreases more than offset increases in airfreight pricing and truckload and LTL volumes.

Total transportation revenues increased driven by higher pricing for airfreight and ocean services due to the impact of the COVID-19 pandemic on capacity.

These increases were largely offset by the impact of the COVID-19 pandemic on the truckload market which has experienced lower pricing due to slowdowns of demand and production in many industry verticals.

Despite industry freight volume declines, we achieved volume growth in both NAST truckload and LTL services which is reflective of our pricing strategies to ensure we are near the top of our customers' routing guides.

Total purchased transportation and related services decreased due to decreased cost of transportation in our surface transportation service lines resulting from softening market demand and excess carrier capacity.

These decreases were partially offset by a significant increase in airfreight pricing.

Our sourcing total revenue and purchased products sourced for resale increased due to higher pricing and costs per case which were partially offset by lower case volume most notably in the food service industry which has been significantly impacted by the COVID-19 pandemic.

Total purchased transportation and related services increased driven by the high cost for airfreight and ocean capacity in the marketplace due to the impact of the COVID-19 pandemic in addition to increased volume in truckload and LTL services.

Our sourcing total revenue and purchased products sourced for resale increased due to higher pricing and costs per case which was partially offset by lower case volume most notably in the food service industry which has been significantly impacted by the COVID-19 pandemic.

Net revenues.

Our transportation net revenue margin decreased driven by margin compression in truckload services due to the significant transportation cost volatility relative to our contractual customer pricing resulting from the impact of the COVID-19 pandemic as we continued to meet our customer commitments despite moderating declines or, in some instances, increases for the cost of capacity.

Our transportation net revenue margin decreased driven by margin compression in truckload services due to the tight carrier capacity in the marketplace and the significant transportation cost volatility resulting from the impact of the COVID-19 pandemic relative to our contractual customer pricing.

We have continued to meet our customer commitments despite moderating declines or, in some instances, increases for the cost of capacity, which has resulted in margin compression.

Partially offsetting these declines was an increase in airfreight pricing resulting in margin expansion as we were able to leverage our contractual airfreight capacity despite significant shortages in the airfreight market.

Sourcing net revenue margin declined due to a decrease in net revenue per case.

Sourcing net revenue margin declined as the costs of purchased products sourced for resale increased at a faster rate than our sourcing total revenues.

Operating expenses.

Personnel expenses decreased primarily due to declines in performance-based compensation and short-term cost reductions, including furloughs and reduced work hours, that were implemented in the second quarter of 2020.

Personnel expenses decreased primarily due to declines in variable compensation and short-term cost reductions, including furloughs and reduced work hours.

Average headcount decreased 2.6 percent.

SG&A expenses increased driven primarily by an $11.5 million loss on the sale-leaseback of a company-owned data center and elevated purchased services related to accelerating our growth and cost savings initiatives, partially offset by elimination of non-essential travel.

SG&A expenses increased driven primarily by increases in occupancy expenses, including those attributable to acquisitions, and the reserve for credit losses, and an $11.5 million loss on the sale-leaseback of a company-owned data center, partially offset by the elimination of non-essential travel.

Interest and other expense.

Interest and other expense primarily consisted of interest expense of $25.0 million in addition to a $1.1 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses in the six months ended June 30, 2020.

Interest expense decreased driven by a lower average debt balance and lower interest rates in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The six months ended June 30, 2019,

included a $2.2 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses in addition to approximately $5 million of miscellaneous other income.

Interest and other expense primarily consisted of interest expense of $36.6 million partially offset by a $2.2 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses in the nine months ended September 30, 2020.

Interest expense decreased driven by a lower average debt balance and lower interest rates in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The nine months ended September 30, 2019 included a $3.3 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses in addition to approximately $5.6 million of miscellaneous other income.

Provision for income taxes.

Our effective income tax rate was 18.6 percent for the six months ended June 30, 2020 and 22.7 percent for the six months ended June 30, 2019.

The effective income tax rate for the six months ended June 30, 2020 was lower than the statutory federal income tax rate primarily due to the tax impact of share-based payment awards, including the tax benefit from the delivery of a one-time deferred stock award that was granted to the company's prior Chief Executive Officer in 2000, which reduced the rate lower than the statutory rate by 4.2 percentage points and foreign tax impacts in the six months ended June 30, 2020.

The effective income tax rate for the six months ended June 30, 2019 was higher than the statutory federal income tax rate due to state income taxes, net of federal benefit, and foreign income taxes, but was partially offset by the tax impact of share-based payment awards.

Our effective income tax rate was 17.3 percent for the nine months ended September 30, 2020 and 22.5 percent for the nine months ended September 30, 2019.

The effective income tax rate for the nine months ended September 30, 2020 was lower than the statutory federal income tax rate primarily due to the tax impact of share-based payment awards, including the tax benefit from the delivery of a one-time deferred stock award that was granted to the co mpany's prior Chief Executive Officer in 2000, which reduced the rate by 4.1 percentage points in addition to foreign tax impacts which reduced the rate by 3.1 percentage points.

The effective income tax rate for the nine months ended September 30, 2019 was higher than the statutory federal income tax rate due to state income taxes, net of federal benefit, and foreign income taxe s, but was partially offset by the tax impact of share-based payment awards and the combined tax impact of GILTI and FDII.

NAST Segment Results of Operations

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2020 2019 % change 2020 2019 % change

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Income from operations $ 122,526 $ 176,200 (30.5) % $ 357,898 $ 592,215 (39.6) %

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 % change 2020 2019 % change

Average headcount 6,702 7,448 (10.0) % 6,870 7,436 (7.6) %

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Intermodal 2.5 % 3.5 %

Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

Total revenues and direct costs.

The results of NAST were impacted by the COVID-19 pandemic during the three months ended June 30, 2020 as discussed in the market and business trends sections above.

NAST total revenues decreased due to decreased pricing and volumes in truckload and LTL services.

NAST cost of transportation and related services experienced significant intraperiod volatility and ultimately decreased driven by decreased cost of capacity in truckload and LTL in addition to lower volumes.

N AST total revenues and direct costs increased due to increased truckload pricing and increased volumes in LTL and truckload services.

These increases were partially offset by lower pricing in LTL services.

The increased pricing in truckload was the result of demand and production recovering at a faster rate than carrier capacity returning to the market leading to sharp increases to the cost of purchased transportation.

Despite industry freight volume declines, we achieved volume growth in both truckload and LTL services which is reflective of our pricing strategies to ensure we are near the top of our customers' routing guides.

Net revenues.

NAST net revenues decreased driven primarily by margin compression in truckload services due to the significant transportation cost volatility experienced relative to our contractual customer pricing as we continued to meet our customer commitments despite moderating declines or, in some instances, increases for the cost of capacity.

Excluding the estimated impacts of the decrease in fuel costs, our average truckload rate per mile charged to our customers decreased approximately 5.5 percent in the second quarter of 2020 compared to the second quarter of 2019.

Our truckload transportation costs decreased approximately 2 percent, excluding the estimated decrease in fuel costs.

NAST LTL net revenues decreased primarily due to reduced margins and decreased volume most notably with small- to mid-sized customers who were disproportionately impacted by the COVID-19 pandemic.

The acquisition of Prime Distribution contributed 4.0 percentage points to LTL net revenue growth in the second quarter of 2020.

NAST intermodal net revenues increased primarily due to improved net revenue margin.

NAST net revenues decreased driven primarily by margin compression in truckload services due to the tight carrier capacity in the market leading to sharp increases in the cost of purchased transportation relative to our contractual customer pricing as we continued to meet our customer commitments despite increasing purchased transportation costs.

Our average truckload linehaul rate per mile charged to our customers, which excludes fuel surcharges, increased approximately 10.5 percent in the third quarter of 2020 compared to the third quarter of 2019.

Previously, we had disclosed the change in average truckload linehaul rates compared to the total average truckload rate per mile, which included fuel surcharges.

We believe comparing to average truckload linehaul rate per mile to be preferred because it completely eliminates any impact of fuel charges passed through to our customer.

Our truckload transportation costs, excluding fuel surcharges, increased approximately 16.5 percent.

NAST LTL net revenues decreased primarily due to reduced margins, partially offset by increased volumes.

The acquisition of Prime Distribution contributed 4.0 percentage points to LTL net revenue growth in the third quarter of 2020.

NAST intermodal net revenues increased driven by increased volumes and modest improvement in net revenue margins.

NAST other net revenues increased primarily due to incremental warehousing services related to the acquisition of Prime Distribution.

Operating expenses.

NAST personnel expense decreased primarily due to short-term cost reductions, including furloughs and reduced work hours, in addition to declines in performance-based compensation and a decrease in average headcount.

NAST personnel expense decreased primarily due to short-term cost reductions, including furloughs and reduced work hours, in addition to declines in variable compensation and a decrease in average headcount.

The acquisition of Prime Distribution contributed 4.5 percentage points of growth to NAST average headcount.

NAST SG&A expenses decreased primarily due to elimination of non-essential travel and decreased claims.

NAST SG&A expenses increased

primarily due to the acquisition of Prime, which contributed 9.5 percentage points in addition to an increase to the reserve for credit losses.

The operating expenses of NAST and all other segments include allocated corporate expenses.

Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

Total revenues and direct costs.

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NAST cost of transportation and related services decreased driven by lower cost per mile in truckload services.

NAST cost of transportation and related services increased driven by increased transportation costs per mile in truckload services.

Net revenues.

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These decreases were partially offset by increased volumes in truckload and LTL.

Excluding the estimated impacts of the decrease in fuel costs, our average truckload rate per mile charged to our customers decreased approximately 7 percent reflecting pricing changes related to the marketplace conditions discussed above.

Our truckload transportation costs decreased approximately 2 percent, excluding the estimated decrease in fuel costs.

Our average truckload linehaul rate per mile charged to our customers decreased approximately 2.0 percent.

Our truckload transportation costs, excluding fuel costs, increased approximately 3.5 percent.

NAST LTL net revenues decreased primarily due to reduced margins, partially offset by an increase in volumes.

This decrease was partially offset by the acquisition of Prime Distribution which contributed 3.5 percentage points to LTL net revenue growth.

NAST intermodal net revenues increased primarily due to increased volume and improved net revenue margin.

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Operating expenses.

NAST personnel expense decreased primarily due to declines in performance-based compensation, a decrease in average headcount, and short-term cost reductions, including furloughs and reduced work hours.

NAST personnel expense decreased primarily due to declines in performance-based and variable compensation, a decrease in average headcount, and short-term cost reductions, including furloughs and reduced work hours.

The acquisition of Prime contributed 3.0 percentage points of growth to NAST average headcount.

NAST SG&A expenses increased primarily due to continued investments in technology, higher occupancy costs, and an increase in credit loss expense.

These increases were partially offset by decreased claims and the elimination of non-essential travel.

NAST SG&A expenses increased primarily due to our acquisition of Prime Distribution, which contributed 7.0 percentage points, partially offset by the elimination of non-essential travel and decreased claims.

Global Forwarding Segment Results of Operations

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2020 2019 % change 2020 2019 % change

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Income from operations $ 46,299 $ 24,676 87.6 % $ 117,033 $ 65,497 78.7 %

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 % change 2020 2019 % change

Average headcount 4,607 4,790 (3.8) % 4,716 4,748 (0.7) %

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Customs (2.5) % (7.5) %

Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

Total revenues and direct costs.

The results of Global Forwarding were impacted by the COVID-19 pandemic during the three months ended June 30, 2020 as discussed in the market and business trends sections above.

Global Forwarding total revenues and direct costs increased driven by a significant increase in airfreight pricing due to reduced cargo capacity, an increase in charter flights, and larger than normal shipment sizes creating an environment with unusually high pricing, which was partially offset by volume declines in all service lines.

The results of Global Forwarding were impacted by the COVID-19 pandemic during the three months ended September 30, 2020 as discussed in the market and business trends sections above.

Global Forwarding total revenues and direct costs increased driven by significantly higher pricing and volumes in ocean services.

As many industries resumed production in the third quarter of 2020 demand grew at a faster rate than ocean carrier capacity which resulted in significantly higher pricing for ocean services.

In addition, airfreight pricing continued to be significantly impacted by reduced cargo capacity due to fewer commercial flights, an increase in charter flights, and larger than normal shipment sizes which has created an environment with unusually high pricing.

These increases were partially offset by volume declines in airfreight.

Net revenues.

Ocean transportation net revenues decreased driven by lower volumes due to the impact of COVID-19.

Air transportation net revenues increased significantly due to higher pricing which more than offset a decline in volumes as we were able to leverage our contractual airfreight capacity despite significant shortages in the airfreight market.

Ocean transportation net revenues increased driven by higher pricing and an increase in volumes.

Air transportation net revenues increased due to higher pricing which more than offset a decline in volumes.

Customs net revenues decreased driven primarily by lower volumes.

Operating expenses.

Personnel expenses decreased driven by short-term cost reductions, including furloughs and reduced work hours, in addition to declines in performance-based compensation and a decrease in average headcount.

Personnel expenses increased slightly driven by an increase in variable compensation due to the strong net revenue growth in the third quarter of 2020.

This increase was partially offset by short-term cost reductions and a decrease in average headcount.

SG&A expenses decreased driven by the elimination of non-essential travel.

Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

Total revenues and direct costs.

Total revenues and direct costs increased driven by the significant increase in airfreight pricing near the end of the first quarter and throughout the second quarter of 2020 due to the impact of COVID-19.

This increase was partially offset by volume declines in all service lines.

Total revenues and direct costs increased driven by the significant increase in airfreight and ocean pricing due to the impact of the COVID-19 pandemic.

The airfreight market has been significantly impacted by reduced cargo capacity due to fewer commercial flights, an increase in charter flights, and larger than normal shipment sizes which has created an environment with unusually high pricing.

The price for ocean services has also increased significantly due to tight ocean carrier capacity.

These increases were partially offset by volume declines in all service lines, most notably airfreight.

Net revenues.

Ocean transportation net revenues decreased driven by a decline in volumes but were partially offset by increased pricing.

The acquisition of Space Cargo contributed 1.5 percentage points of ocean net revenue growth for the first sixth months of 2020.

Air transportation net revenues increased significantly due to higher pricing, which more than offset a decline in volumes as we were able to leverage our contractual airfreight capacity despite significant shortages in the airfreight market.

In addition, the acquisition of Space Cargo contributed 2.7 percentage points of net revenue growth in air transportation.

Ocean transportation net revenues increased slightly driven by increased pricing which was mostly offset by a decline in volumes.

The acquisition of Space Cargo contributed approximately 2.0 percentage points of ocean net revenue growth for the nine months ended September 30, 2020.

Air transportation net revenues increased significantly due to higher pricing, which more than offset a decline in volumes as we were able to leverage our contractual airfreight capacity despite

significant shortages in the airfreight market.

The acquisition of Space Cargo contributed approximately 3.0 percentage points of net revenue growth in airfreight.

Customs net revenues decreased driven by decreased volumes.

Operating expenses.

Personnel expenses decreased driven by short-term cost reductions, including furloughs and reduced work hours, in addition to declines in performance-based compensation, partially offset by an increase in average headcount.

Personnel expenses decreased driven by short-term cost reductions, including furloughs and reduced work hours, and a slight decrease in average headcount in addition to declines in healthcare costs.

SG&A expenses decreased driven by the elimination of non-essential travel.

1 unchanged sentence

All Other and Corporate includes our Robinson Fresh and Managed Services segment, as well as Other Surface Transportation outside of North America and other miscellaneous revenues and unallocated corporate expenses.

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2019 2018 % change 2020 2019 % change

4 unchanged sentences

Total net revenues $ 63,673 $ 63,856 (0.3) % $ 202,471 $ 195,732 3.4 %

Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019

Total revenues increased modestly driven by increased pricing in our Robinson Fresh business as elevated demand at large grocers and retailers was partially offset with decreased demand from customers in the food service industry resulting from the COVID-19 pandemic.

The increase in Robinson Fresh was mostly offset by lower pricing in our Other Surface Transportation business.

Robinson Fresh net revenues declined due to a decrease in case volumes, partially offset by increased net revenue per case.

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

Total revenues increased driven by increased pricing in our Robinson Fresh business which was partially offset by decreased demand from customers in the food service industry resulting from the COVID-19 pandemic.

Robinson Fresh net revenues declined due to a decrease in net revenue per case and lower case volumes.

Managed Services net revenues increased driven by a combination of new customer wins and selling additional services to existing customers.

Other Surface Transportation net revenues increased driven by increased margin and the acquisition of Dema Service, which contributed 4.7 percentage points of growth.

Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019

Total revenues increased due to elevated demand at large grocers and retailers especially near the end of the first quarter of 2020 resulting in increased pricing in our Robinson Fresh business.

In addition, total revenues increased in Other Surface Transportation driven by increased volume and pricing including the impact of the Dema Service acquisition.

Other Surface Transportation net revenues decreased driven by decreased margin in truckload services in Europe.

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

Total revenues increased due to increased pricing in our Robinson Fresh business related to elevated demand at large grocers and retailers especially near the end of the first quarter of 2020.

This increase was partially offset by decreased demand from customers in the food service industry resulting from the COVID-19 pandemic.

In addition, total revenues increased in Other Surface Transportation driven by the impact of the Dema Service acquisition.

Robinson Fresh net revenues decreased driven by reduced case volumes partially offset by increased net revenue per case.

Managed Services net revenues increased driven by a combination of new customer wins and selling additional services to existing customers.

Other Surface Transportation net revenues increased primarily driven by the acquisition of Dema Service, which contributed 6.5 percentage points of growth.

LIQUIDITY AND CAPITAL RESOURCES

We have historically generated substantial cash from operations, which has enabled us to fund our organic growth while paying cash dividends and repurchasing stock.

In addition, we maintain the following debt facilities as described in Note 4, Financing Arrangements (dollars in thousands):

Description Carrying Value as of June 30, 2020 Borrowing Capacity Maturity

Revolving credit facility $ — $ 1,000,000 October 2023

Senior Notes, Series A 175,000 175,000 August 2023

Senior Notes, Series B 150,000 150,000 August 2028

Senior Notes, Series C 175,000 175,000 August 2033

Receivables securitization facility (1)

— 250,000 December 2020

Senior Notes (1)

592,873 600,000 April 2028

Total debt $ 1,092,873 $ 2,350,000

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(1) Net of unamortized discounts and issuance costs.

We expect to use our current debt facilities and potentially other indebtedness incurred in the future to assist us in continuing to fund working capital, capital expenditures, possible acquisitions, dividends, and share repurchases, although we have temporarily suspended share repurchase activity as described below.

Cash and cash equivalents totaled $362.2 million as of June 30, 2020 and $447.9 million as of December 31, 2019.

Cash and cash equivalents held outside the United States totaled $296.7 million as of June 30, 2020 and $405.1 million as of December 31, 2019.

Working capital decreased from $1.1 billion at December 31, 2019, to $930.5 million at June 30, 2020.

We prioritize our investments to grow the business, as we require some working capital and a relatively small amount of capital expenditures to grow.

We are continually looking for acquisitions, but those acquisitions must fit our culture and enhance our growth opportunities.

The following table summarizes our major sources and uses of cash and cash equivalents (dollars in thousands):

Six Months Ended June 30,

2020 2019 % change

Sources (uses) of cash:

Cash provided by operating activities $ 505,643 $ 456,526 10.8 %

Capital expenditures (25,039) (31,564)

Acquisitions (223,230) (58,379)

Other 5,525 8

Cash used for investing activities (242,744) (89,935) 169.9 %

Repurchase of common stock (68,563) (173,622)

Cash dividends (137,104) (139,010)

Net payments on debt (143,000) (93,000)

Other 5,329 15,272

Cash used for financing activities (343,338) (390,360) (12.0) %

Effect of exchange rates on cash and cash equivalents (5,183) 461

Net change in cash and cash equivalents $ (85,622) $ (23,308)

Cash flow from operating activities.

Cash flow from operating activities increased during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to favorable changes in working capital.

The favorable changes in working capital were primarily related to a sequential increase in accounts payable associated with increasing cost of capacity late in the second quarter of 2020.

This impact was partially offset by a sequential increase in accounts receivable.

Given the COVID-19 pandemic, we are closely monitoring credit and collections activities to minimize risk as well as working with our customers to facilitate the movement of goods across their supply chains while also ensuring timely payment.

Cash used for investing activities.

We used $222.7 million for the acquisition of Prime Distribution during the six months ended June 30, 2020.

We used $44.1 million for the acquisition of Space Cargo and $14.2 million for the acquisition of Dema Service during the six months ended June 30, 2019.

Capital expenditures consisted primarily of investments in information technology, which are intended to increase employee productivity, automate interactions with our customers and contracted carriers, and improve our internal workflows to help expand our operating margins and grow the business.

Cash used for financing acti vities.

Net repayments on debt in the six months ended June 30, 2020 were to reduce the outstanding balance of the Receivables Securitization Facility.

The decrease in cash dividends was due to a decrease in shares outstanding during the six months ended June 30, 2020 and timing of dividends processed related to employee benefit plans, partially offset by a $0.01 per share dividend increase in 2020 compared to 2019.

The decrease in cash used for share repurchases was due to a decrease in the number of shares repurchased during the six months ended June 30, 2020 as we have temporarily suspended our share repurchase activity near the end of the first quarter of 2020 as we continue to assess the impacts of COVID-19.

In addition, the average price paid per share decreased compared to the same period of 2019.

The number of shares we repurchase, if any, during future periods will vary based on our cash position, other potential uses of our cash, and market conditions.

Over the long term, we remain committed to our quarterly dividend and share repurchases to enhance shareholder value, and we expect to resume our opportunistic share repurchase program in the fourth quarter of this year.

Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe that, assuming no change in our current business plan, our available cash, together with expected future cash generated from operations, the amount available under our credit facilities, and credit available in the market, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends for at least the next 12 months.

We also believe we could obtain funds under lines of credit or other forms of indebtedness on short notice, if needed.

Recently Issued Accounting Pronouncements

Refer to Note 1, Basis of Presentation , contained in this quarterly report and in the company's 2019 Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements.

Other Surface Transportation net revenues increased driven by the acquisition of Dema Service, which contributed 4.5 percentage points of growth.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to the company's 2019 Annual Report on Form 10-K for a complete discussion regarding our critical accounting policies and estimates.

As of June 30, 2020, there were no material changes to our critical accounting policies and estimates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to the company’s 2019 Annual Report on Form 10-K for a complete discussion on the company’s market risk.

As of June 30, 2020 there were no material changes in market risk from those disclosed in the company’s 2019 Annual Report on Form 10-K.

As of September 30, 2020, there were no material changes to our critical accounting policies and estimates.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis