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Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2020-10-30 · 220 added, 213 removed, 100 unchanged (81% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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

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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;

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;

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changes in our customer base due to possible consolidation among our customers;

cyber-security related risks;

risks associated with operations outside of the United States;

our ability to successfully integrate the operations of acquired companies with our historic operations;

risks associated with litigation, including contingent auto liability and insurance coverage;

risks associated with operations outside of the United States;

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;

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.

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.

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Robinson Worldwide, Inc.

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.

Robinson,” “the company,” “we,” “us,” or “our”) is one of the world's largest logistics platforms.

Our mission is to improve the world's supply chains through our people, processes, and technology by delivering exceptional value to our customers and suppliers.

We provide freight transportation services and logistics solutions to companies of all sizes in a wide variety of industries.

We operate through a network of offices in North America, Europe, Asia, Oceania, and South America.

We 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.

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

We offer a global suite of services using tailored, market-leading technology 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, technology, 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 March 31,

Transportation $ 4,560,227 $ 3,542,118

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Purchased products sourced for resale 220,204 236,942

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

Direct internally developed software amortization 4,647 3,745

Total direct costs 4,106,136 3,240,800

Gross profit / Gross profit margin 697,733 14.5 % 564,208 14.8 %

Direct internally developed software amortization 4,647 3,745

Adjusted gross profit / Adjusted gross profit margin $ 702,380 14.6 % $ 567,953 14.9 %

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 March 31,

Total revenues $ 4,803,869 $ 3,805,008

Operating income 223,329 109,440

Operating margin 4.6 % 2.9 %

Adjusted gross profit $ 702,380 $ 567,953

Operating income 223,329 109,440

Adjusted operating margin 31.8 % 19.3 %

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.

The North American surface transportation market continues to be impacted by tightening carrier capacity driven by an ongoing shortage of long-haul drivers.

The demand for transportation has continued to improve as businesses attempt to replenish low inventory levels to meet rising consumer demand fueled by the re-opening of the economy and additional fiscal stimulus.

These conditions have resulted in historically high pricing for purchased transportation.

Industry freight volumes, as measured by the Cass Freight Index, increased approximately 7.5 percent during the first quarter of 2021 compared to the first 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.

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 first 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 first quarter of 2020 and is reflective of the increasingly tight carrier capacity in the first 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 face unprecedented disruptions due to port congestion, shipping container shortages, and the ongoing air freight capacity shortage caused by a reduction of commercial flights resulting from the COVID-19 pandemic.

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.

In addition, the ongoing air freight capacity shortage has continued to result in an increase in charter flights and larger than normal shipment sizes.

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.

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.

Our first quarter of 2021 surface transportation results are largely consistent with the overall market trends summarized above, although we did experience volume increases slightly below the industry trends as measured by the Cass Freight Index.

Industry freight volumes increased approximately 7.5 percent compared to our combined NAST truckload and less than truckload ("LTL") volume increase of 7.0 percent per business day.

We continued to work with our customers to meet our contractual commitments during the first quarter of 2021 while adapting our pricing to reflect the rising cost environment.

The improving demand and tight carrier capacity conditions resulted in our average truckload linehaul cost per mile, excluding fuel costs, increasing 33.5 percent in the first quarter of 2021.

Our average truckload linehaul rate charged to our customers, excluding fuel surcharges, increased approximately 33.0 percent in the first 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 triple digit percentage growth in both total revenue and cost of transportation for our ocean and air freight service lines.

Ocean volumes increased 27.0 percent with strong growth in all regions we serve driven by higher award sizes from existing customers, new customer growth, and the adverse impact the COVID-19 pandemic had on ocean volumes in the first 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 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.

During the three months ended March 31, 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.

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 have also adopted work-from-home arrangements, and as of March 31, 2021, 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 2021 and going forward.

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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.

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 adjusted gross profit 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.

• 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.

The following summarizes select first quarter 2021 year-over-year operating comparisons to first quarter 2020:

• Total revenues increased 26.3 percent to $4.8 billion, driven primarily by higher pricing and higher volume across most of our service lines.

• Gross profits increased 23.7 percent to $697.7 million.

Adjusted gross profits increased 23.7 percent to $702.4 million, primarily driven by higher pricing in our truckload, ocean and air service lines, higher volume in our ocean, LTL and air service lines and contributions from the acquisition of Prime Distribution.

• Personnel expenses increased 9.3 percent to $360.8 million, primarily driven by higher incentive compensation costs.

Average headcount decreased 2.9 percent, despite the Prime acquisition contributing approximately one percentage point of growth.

• Other selling, general, and administrative (“SG&A”) expenses decreased 7.9 percent to $118.2 million primarily due to lower travel expenses and credit losses.

• Income from operations totaled $223.3 million, up 104.1 percent due to the increase in adjusted gross profits.

• Adjusted operating margin of 31.8 percent increased 1,250 basis points.

• Interest and other expenses totaled $11.3 million, consisting primarily of $12.2 million of interest expense, which decreased $0.4 million versus last year due to a lower average debt balance and a lower average interest rate.

The first quarter also included a $2.9 million unfavorable impact from foreign currency revaluation and realized foreign currency gains and losses.

• The effective tax rate in the quarter was 18.3 percent compared to 17.1 percent in the first quarter last year.

This increase was primarily due to higher profits.

• Diluted earnings per share (EPS) increased 124.6 percent to $1.28.

• Cash flow from operations decreased $115.2 million driven by a large increase in working capital during the three months ended March 31, 2021.

CONSOLIDATED RESULTS OF OPERATIONS

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

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

2020 2019 % change 2020 2019 % change

Three Months Ended March 31,

2021 2020 % change

Transportation $ 4,560,227 $ 3,542,118 28.7 %

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Diluted net income per share $ 1.28 $ 0.57 124.6 %

Net revenue margin percentage

Transportation 14.4 % 16.9 % (2.5) pts 15.6 % 17.9 % (2.3) pts

Sourcing 8.2 % 10.1 % (1.9) pts 9.4 % 10.7 % (1.3) pts

Total net revenue margin 13.9 % 16.4 % (2.5) pts 15.2 % 17.4 % (2.2) pts

Average headcount 14,997 15,450 (2.9) %

Adjusted gross profit margin percentage (1)

Transportation 14.9 % 15.3 % (0.4) pts

Sourcing 9.6 % 9.9 % (0.3) pts

Total adjusted gross profit margin 14.6 % 14.9 % (0.3) pts

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(1) Adjusted gross profit margin is a non-GAAP financial measure explained above.

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

Total revenues and direct costs.

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.

Lower case volume was driven by decreased demand in the food service industry which has been significantly impacted by the COVID-19 pandemic.

Net revenues.

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 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 $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 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

Consolidated Results of Operations—Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Total revenues and direct costs.

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

Total transportation revenues increased driven by increased pricing in our truckload, ocean, and air freight service lines in addition to increased volumes in our ocean and LTL service lines.

The increased pricing in truckload, ocean and air freight was driven by tightening carrier capacity as discussed above in the market trends section.

These increases were partially offset by a decrease in truckload 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 air freight service lines, in addition to higher volumes in the ocean and LTL service lines.

Our sourcing total revenue and purchased products sourced for resale decreased due to lower pricing and costs per case and a decline in volume.

Gross profits and adjusted gross profits.

Our transportation adjusted gross profit increased due to improved pricing in truckload and the strong performance of our ocean and air freight service lines in addition to volume increases in LTL.

Our transportation adjusted gross profit margin decreased driven by declines across most service lines but was partially offset by improved adjusted gross profit margin in truckload.

Sourcing adjusted gross profit decreased due to a decrease in case volumes and lower adjusted gross profit per case in the retail industry.

Operating expenses.

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 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.

Personnel expenses increased primarily due to increases in incentive compensation which was partially offset by a decrease in average headcount.

Average headcount decreased 2.9 percent, despite the Prime Distribution acquisition contributing approximately one percentage point of growth.

SG&A expenses decreased due to lower travel expenses and credit losses.

Interest and other expense.

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.

Interest and other expense primarily consisted of interest expense of $12.2 million in the first quarter of 2021 and a $2.9 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses.

These expenses were partially offset by a $2.9 million local government subsidy in Asia for achieving specified performance criteria that was almost entirely offset by a reduction in foreign tax credits within the provision for income taxes.

Interest expense decreased modestly driven by a lower average debt balance and a lower average interest rate in the first quarter of 2021 compared to the first quarter of 2020.

The first quarter of 2020 included a $2.9 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Provision for income taxes.

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.

Our effective income tax rate was 18.3 percent for the first quarter of 2021 compared to 17.1 percent for the first quarter of 2020.

The effective income tax rate for the first quarter ended March 31, 2021, was lower than the statutory federal income tax rate primarily due to the tax impact of share-based payment awards, which reduced the effective tax rate by 3.2 percentage points.

Taxes on foreign earnings also contributed to a lower federal income tax rate, reducing our effective tax rate in the three months ended March 31, 2021 by 1.7 percentage points.

These impacts were partially offset by state income tax expense, which increased the effective income tax rate.

The effective income tax rate for the first quarter of 2020 was lower than the statutory federal income tax rate due to the tax impact of share-based payment awards, which reduced the effective tax rate by 3.6 percentage points, and foreign tax benefits recorded in the three months ended March 31, 2020 but were partially offset by state income taxes, net of federal benefit and foreign income taxes.

NAST Segment Results of Operations

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

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

Three Months Ended March 31,

(dollars in thousands) 2021 2020 % change

Total revenues $ 3,211,423 $ 2,823,745 13.7 %

Costs and expenses:

Purchased transportation and related services 2,790,315 2,450,967 13.8 %

Truckload 226,992 299,065 (24.1) % 722,843 1,011,008 (28.5) %

LTL 117,602 122,959 (4.4) % 335,360 359,403 (6.7) %

Intermodal 7,297 6,878 6.1 % 22,197 18,875 17.6 %

Other 16,052 4,858 230.4 % 39,877 17,442 128.6 %

Total net revenues 367,943 433,760 (15.2) % 1,120,277 1,406,728 (20.4) %

Personnel expenses 183,929 172,832 6.4 %

Other selling, general, and administrative expenses 100,395 101,420 (1.0) %

Total costs and expenses 3,074,639 2,725,219 12.8 %

Income from operations $ 136,784 $ 98,526 38.8 %

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

2020 2019 % change 2020 2019 % change

Three Months Ended March 31,

2021 2020 % change

Average headcount 6,537 7,038 (7.1) %

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Truckload (6.5) %

Adjusted gross profits (1)

Truckload $ 280,304 $ 243,686 15.0 %

LTL 120,117 112,330 6.9 %

Intermodal 2.5 % 3.5 %

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

Other 20,687 16,762 23.4 %

Total adjusted gross profits $ 421,108 $ 372,778 13.0 %

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(1) Adjusted gross profit margin is a non-GAAP financial measure explained above.

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Total revenues and direct costs.

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 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.

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

The increased pricing in truckload was driven by tightening carrier capacity as discussed above in the market trends section.

These increases were partially offset by a decrease in truckload volumes.

Total purchased transportation and related services increased, driven by higher average truckload linehaul costs per mile in addition to higher volumes in the LTL service line.

Gross profits and adjusted gross profits.

NAST truckload adjusted gross profits increased driven primarily by improved pricing in truckload and volume increases in LTL.

The improved pricing in truckload was the result of an increase in spot market opportunities and continued progress repricing our contractual truckload business to reflect the rising cost environment.

Our average truckload linehaul rate per mile charged to our customers, which excludes fuel surcharges, increased approximately 33.0 percent in the first quarter of 2021 compared to the first quarter of 2020.

Our truckload transportation costs, excluding fuel surcharges, increased approximately 33.5 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.

NAST LTL adjusted gross profits increased due to increased volumes including those due to acquisition, partially offset by lower adjusted gross profit per transaction.

The acquisition of Prime Distribution contributed 3.0 percentage points to LTL adjusted gross profit growth in the first quarter of 2021.

NAST other adjusted gross profits 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 variable compensation and a decrease in average headcount.

NAST personnel expense increased primarily due to increases in incentive compensation which were partially offset by a decrease in average headcount.

The acquisition of Prime Distribution contributed 2.5 percentage points of growth to NAST average headcount.

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.

NAST SG&A expenses decreased slightly due to a reduction in the reserve for credit loss, decreases in other purchased services, and reduced travel expenses.

These decreases were largely offset by an increase from the ongoing expenses of Prime Distribution.

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

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

Total revenues and direct costs.

NAST revenues decreased due to lower pricing in truckload and, to a lesser extent, LTL services, which were partially offset by increases in truckload and LTL volumes.

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

Net revenues.

NAST net revenues decreased driven primarily by margin compression in truckload services due to the significant transportation cost pricing 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.

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

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.

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 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 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 September 30, Nine Months Ended September 30,

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

Three Months Ended March 31,

(dollars in thousands) 2021 2020 % change

Total revenues $ 1,156,039 $ 530,384 118.0 %

Costs and expenses:

Purchased transportation and related services 941,739 402,070 134.2 %

Ocean 88,878 77,777 14.3 % 237,422 234,623 1.2 %

Air 33,836 26,195 29.2 % 112,254 77,543 44.8 %

Customs 22,463 23,719 (5.3) % 63,115 68,892 (8.4) %

Other 12,480 8,124 53.6 % 36,140 23,929 51.0 %

Total net revenues 157,657 135,815 16.1 % 448,931 404,987 10.9 %

Personnel expenses 81,009 70,893 14.3 %

Other selling, general, and administrative expenses 42,702 45,462 (6.1) %

Total costs and expenses 1,065,450 518,425 105.5 %

Income from operations $ 90,589 $ 11,959 657.5 %

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

2020 2019 % change 2020 2019 % change

Three Months Ended March 31,

2021 2020 % change

Average headcount 4,735 4,824 (1.8) %

Service line volume statistics

Customs 13.5 %

Adjusted gross profits (1)

Ocean $ 135,396 $ 69,810 93.9 %

1 unchanged sentence

Customs 24,223 21,193 14.3 %

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 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 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 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.

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

Other 9,434 10,434 (9.6) %

Total adjusted gross profits $ 214,300 $ 128,314 67.0 %

________________________________

(1) Adjusted gross profit margin is a non-GAAP financial measure explained above.

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Total revenues and direct costs.

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 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.

Global Forwarding total revenues and direct costs increased driven by significantly higher pricing and volumes in our ocean service line and, to a lesser extent, higher pricing and volumes in our air freight service line.

The increased ocean pricing was driven by the significant disruptions impacting the industry resulting in tightening carrier capacity combined with strong demand as discussed above in the market trends section.

Air freight pricing continued to be significantly impacted by reduced cargo capacity due to fewer commercial flights resulting from the COVID-19 pandemic, an increase in charter flights, and larger than normal shipment sizes which has created an environment with unusually high pricing.

Gross profits and adjusted gross profits.

Ocean transportation adjusted gross profits increased driven by significantly higher pricing and an increase in volumes.

Air transportation adjusted gross profits also increased primarily due to higher pricing and to a lesser extent increased volumes.

Customs adjusted gross profits increased driven by an increase in transaction volume.

Operating expenses.

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.

Personnel expenses increased driven by an increase in incentive compensation due to the strong adjusted gross profit growth in the first quarter of 2021.

This increase was partially offset by a decrease in average headcount.

SG&A expenses decreased driven by lower amortization and travel expenses.

All Other and Corporate Segment Results of Operations

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 September 30, Nine Months Ended September 30,

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

Three Months Ended March 31,

(dollars in thousands) 2021 2020 % change

Total revenues $ 436,407 $ 450,879 (3.2) %

Income from operations (4,044) (1,045) N/M

Adjusted gross profits (1)

Robinson Fresh 24,948 27,458 (9.1) %

1 unchanged sentence

Other Surface Transportation 16,468 16,876 (2.4) %

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

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 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 driven by the acquisition of Dema Service, which contributed 4.5 percentage points of growth.

Total adjusted gross profits $ 66,972 $ 66,861 0.2 %

________________________________

(1) Adjusted gross profit margin is a non-GAAP financial measure explained above.

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Total revenues decreased driven by lower pricing and a decline in volume within our Robinson Fresh business.

Robinson Fresh adjusted gross profits declined due to a decrease in case volumes and lower adjusted gross profit per case in the retail industry .

Managed Services adjusted gross profits increased driven by increased transaction volumes.

Other Surface Transportation adjusted gross profits decreased as a result of a decline in Europe truckload volumes.

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 March 31, 2021 Borrowing Capacity Maturity

Revolving credit facility $ 250,000 $ 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

Senior Notes (1)

593,517 600,000 April 2028

Total debt $ 1,343,517 $ 2,350,000

______________________________________________

(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.

Cash and cash equivalents totaled $217.6 million as of March 31, 2021 and $243.8 million as of December 31, 2020.

Cash and cash equivalents held outside the United States totaled $204.8 million as of March 31, 2021 and $230.9 million as of December 31, 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):

Three Months Ended March 31,

2021 2020 % change

Sources (uses) of cash:

Cash (used for) provided by operating activities $ (56,692) $ 58,499 (196.9) %

Capital expenditures (13,506) (14,703)

Acquisitions, net of cash acquired — (223,617)

Cash used for investing activities (13,506) (238,320) (94.3) %

Repurchase of common stock (130,204) (68,563)

Cash dividends (70,030) (69,871)

Net borrowings on debt 250,000 178,000

Other financing activities (3,003) (2,526)

Cash provided by financing activities 46,763 37,040 26.3 %

Effect of exchange rates on cash and cash equivalents (2,750) (10,505)

Net change in cash and cash equivalents $ (26,185) $ (153,286)

Cash flow from operating activities.

Cash flow from operating activities decreased significantly during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to unfavorable changes in working capital.

The unfavorable changes in working capital were primarily related to a sequential increase in accounts receivable and contract assets partially offset by a related increase in accounts payable and accrued transportation expense.

Both increases were driven by higher pricing and volumes in nearly all service lines during the first quarter of 2021.

Despite the increase in accounts receivables, we are not seeing a deterioration in the quality of our accounts receivables balance, and the results of the quarter include sequential and year-over-year improvements in credit losses and the percent of accounts receivable that are past due.

Additionally, 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.

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 adjusted operating margins and grow the business.

We used $223.1 million for the acquisition of Prime Distribution during the three months ended March 31, 2020.

Cash used for financing acti vities.

Net borrowings on debt in the three months ended March 31, 2021 and 2020 were to fund working capital needs.

The increase in cash used for share repurchases was due to an increase in the number of shares repurchased during the three months ended March 31, 2021 as we temporarily suspended our share repurchase activity near the end of the first quarter of 2020 as we continued to assess the impacts of the COVID-19 pandemic.

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.

Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

We may seek to retire or purchase our outstanding Senior Notes through open market cash purchases, privately negotiated transactions or otherwise.

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.

As of March 31, 2021, we were in compliance with all of the covenants under the Credit Agreement, Note Purchase Agreement, and Senior Notes.

Recently Issued Accounting Pronouncements

Refer to Note 1, Basis of Presentation , contained in this quarterly report and in the company's 2020 Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to the company's 2020 Annual Report on Form 10-K for a complete discussion regarding our critical accounting policies and estimates.

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

As of March 31, 2021, there were no material changes to our critical accounting policies and estimates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to the company’s 2020 Annual Report on Form 10-K for a complete discussion on the company’s market risk.

As of March 31, 2021 there were no material changes in market risk from those disclosed in the company’s 2020 Annual Report on Form 10-K.

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