What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-10-29 · 128 added, 193 removed, 197 unchanged (62% of the section changed)

9 unchanged sentences

freight levels and increasing costs and availability of truck capacity or alternative means of transporting freight;

risks associated with significant disruptions in the transportation industry;

changes in relationships with existing contracted truck, rail, ocean, and air carriers;

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

risks with reliance on technology to operate our business;

cyber-security related risks;

risks associated with operations outside of the United States;

our ability to identify or complete suitable acquisitions;

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

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

risks related to the elimination of LIBOR;

risks associated with the potential impact of changes in government regulations;

our ability to hire and retain a sufficient number of qualified personnel;

risks associated with the changes to income tax regulations;

risks associated with the produce industry, including food safety and contamination issues;

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The reconciliation of gross profit to adjusted gross profit and gross profit margin to adjusted gross profit margin is presented below (dollars in thousands):

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

2021 2020 2021 2020

Three Months Ended March 31,

Transportation $ 6,528,351 $ 4,560,227

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The reconciliation of operating margin to adjusted operating margin is presented below (dollars in thousands) :

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

2021 2020 2021 2020

Three Months Ended March 31,

Total revenues $ 6,815,953 $ 4,803,869

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MARKET TRENDS

The North American surface transportation market continues to be impacted by tight carrier capacity as strong demand combined with ongoing driver availability challenges and supply chain disruptions caused by port congestion and weather events continue to drive purchased transportation costs to new historic levels.

Industry freight volumes, as measured by the Cass Freight Index, increased approximately 9 percent during the third quarter of 2021 compared to the third quarter of 2020.

This compares to an 8 percent decline for the same index during the third quarter of 2020.

The North American surface transportation market continues to be impacted by tight carrier capacity although the market did start to soften within the first quarter of 2022.

While driver availability challenges and supply chain disruptions caused by port congestion have continued, the market has started to show signs of improvement.

Moderating demand combined with capacity entering the market has resulted in purchased transportation costs declining near the end of the first quarter of 2022.

Despite these declines, purchased transportation costs continue to be well above historic levels and above those in the first quarter of 2021.

Industry freight volumes, as measured by the Cass Freight Index, were flat during the first quarter of 2022 compared to the first quarter of 2021.

This compares to a 7.5 percent increase for the same index during the first quarter of 2021.

One of the metrics we use to measure market conditions is the truckload routing guide depth from our Managed Services business.

Routing guide depth represents the number of carriers contacted prior to acceptance when procuring a transportation provider.

The average routing guide depth of tender in the third quarter of 2021 was 1.7, representing that on average, the first or second carrier in a shipper's routing guide was executing the shipment in most cases.

Th is routing guide penetration compares to 1.6 in the third quarter of 2020 and is reflective of the tight carrier capacity in both the third quarter of 2021 and 2020.

The global forwarding market continues to be significantly impacted by supply chain disruptions caused by ongoing port congestion along with equipment and labor shortages.

These disruptions combined with strong demand have continued to drive purchased transportation costs for both ocean and air freight to historic levels.

Due to the unprecedented challenges in the ocean freight market, conversions to air freight have become increasingly common.

This has resulted in a continued increase in charter flights and larger than normal shipment sizes as traditional air freight capacity remains strained by a reduction of commercial flights since the beginning of the COVID-19 pandemic.

The average routing guide depth of tender in the first quarter of 2022 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.

T his average routing guide penetration was consistent with all of 2021.

Within the first quarter of 2022, this metric declined and reached 1.5 by the end of the quarter as more capacity entered the market and demand began to soften resulting in first tender rates climbing across the industry.

The global forwarding market continues to be significantly impacted by supply chain disruptions caused by ongoing port congestion along with transportation equipment shortages.

While port congestion remains challenging in the western United States, conditions showed signs of improvement in the first quarter of 2022, as more freight continues to be diverted to the southern and eastern United States.

In addition, continued pandemic related shutdowns and the regional relocation of manufacturing in Asia have also resulted in shifts in the global supply chain and an easing of demand for ocean freight out of China.

Demand in the air freight market showed signs of slowing in the first quarter of 2022 but remain above historic levels.

Air freight conversions back to ocean freight have increased with more shippers seeking lower supply chain costs by tolerating the longer duration of ocean freight transit.

Air freight capacity remains strained by a reduction of commercial flights since the beginning of the COVID-19 pandemic, although the softening of demand has resulted in a decreased frequency of charter flights.

BUSINESS TRENDS

Our third quarter of 2021 surface transportation results continue to be impacted by the rising cost and price environment summarized in the market trends section.

We have not, however, experienced the significant year over year volume volatility seen in the industry as measured by the Cass Freight Index.

Industry freight volumes increased approximately 9 percent during the third quarter of 2021 compared to an 8 percent decline during the third quarter of 2020.

Our combined NAST truckload and less than truckload ("LTL") volume increased 2.5 percent during the third quarter of 2021 compared to an 8.0 percent increase during the third quarter of 2020.

We have continued to work with our customers to meet our contractual commitments since the beginning of the COVID-19 pandemic which has resulted in a higher than normal percentage of shipments with negative adjusted gross profit margins and less volatility in our combined NAST truckload and LTL volumes as compared to the Cass Freight Index.

We continue to reshape our portfolio by adapting our pricing to reflect the rising cost environment and participating to a greater extent in the spot market.

The strong demand and tight carrier capacity conditions resulted in our average truckload linehaul cost per mile, excluding fuel costs, increasing 26.0 percent during the third quarter of 2021.

Our average truckload linehaul rate charged to our customers, excluding fuel surcharges, increased approximately 27.0 percent during the third quarter of 2021.

Our first quarter of 2022 surface transportation results benefited from the softening market conditions, as periods where the cost of purchased transportation begins to decline often result in improved adjusted gross profits per transaction in our portfolio.

Industry freight volumes as measured by the Cass Freight Index were flat in the first quarter of 2022 compared to the first quarter of 2021.

Industry freight volumes increased approximately 7.5 percent during the first quarter of 2021.

Our combined NAST truckload and less than truckload ("LTL") volume increased 1.0 percent during the first quarter of 2022 compared to a 5.5 percent increase during the first quarter of 2021.

We have continued to reprice our contractual truckload business to reflect the elevated cost environment and participate to a greater extent in the spot market.

As a result of our repricing efforts and the impact of the softening market conditions, our adjusted gross profit per shipment increased and the percentage of shipments with negative adjusted gross profit margins improved significantly in the first quarter of 2022.

Our average truckload linehaul cost per mile, excluding fuel costs, increased 21.0 percent during the first quarter of 2022.

Our average truckload linehaul rate charged to our customers, excluding fuel surcharges, increased approximately 20.5 percent during the first quarter of 2022.

In our global forwarding business, we continued to experience significant increases in purchased transportation costs for both ocean and air freight due to port congestion in addition to the equipment and labor shortages impacting the global forwarding market.

This along with increased volumes has resulted in strong growth in both total revenue and cost of transportation for our ocean and air freight services.

Ocean volumes increased 12.0 percent with strong growth in nearly all regions we serve driven by higher award sizes from existing customers and new customer growth.

In addition, we experienced strong growth in our air freight services driven by ocean freight conversions resulting from the significant disruptions experienced in the industry.

Ocean volumes increased 7.0 percent with strong growth in North America and Europe more than offsetting a modest decline in Asia resulting from pandemic-related shutdowns in China.

Air freight tonnage increased 10.0 percent with strong growth in all regions we serve.

On June 3, 2021, we acquired Combinex Holding B.V.

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Our consolidated results include the results of Combinex as of June 3, 2021.

On March 2, 2020, we acquired all of the outstanding shares of Prime Distribution Services (“Prime Distribution”), a leading provider of retail consolidation services in North America for $222.7 million in cash.

This acquisition adds scale and value-added warehouse capabilities to our retail consolidation platform, adding to our global suite of services.

The acquisition was effective as of February 29, 2020, and therefore the results of operations of Prime Distribution have been included as part of the NAST segment in our consolidated financial statements since March 1, 2020.

SIGNIFICANT DEVELOPMENTS

During the three months ended September 30, 2021, our financial results and operations were impacted by the COVID-19 pandemic and supply chain disruptions impacting the global forwarding and surface transportation markets as described above and discussed throughout Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The extent to which the COVID-19 pandemic and supply chain disruptions impact our financial results and operations for the remainder of 2021 and going forward will depend on future developments which are highly uncertain and cannot be predicted, including fluctuations in the severity of the COVID-19 outbreak and the actions being taken to contain and treat it in addition to actions being taken to resolve issues facing supply chains around the globe.

We have taken a variety of measures to ensure the availability, continuity, and security of our critical infrastructure, ensure the health and safety of our employees around the globe, and provide service and supply chain continuity to our customers and contracted carriers in order to deliver critical and essential goods and services.

We have also adopted work-from-home arrangements, and as of September 30, 2021, approximately 80 percent of our employees were working remotely executing their duties and responsibilities.

We do not believe these policies and initiatives will adversely impact our operations.

Due to the ongoing uncertainty around the severity and duration of the outbreak, including the emergence of COVID-19 variants, we are not able at this time to estimate the impact COVID-19 may have on our financial results and operations for the remainder of 2021 and going forward.

However, the impact could be material in all business segments and could be material during any future period affected either directly or indirectly by this pandemic.

Many businesses have experienced, and may continue to experience, reduced production and output which has resulted, and could continue to result, in a decrease in freight volumes across a number of industries, reducing our contractual and spot-market opportunities.

In addition, a significant number of our contracted carriers have reduced, and may continue to reduce, their capacity or charge higher prices in light of the volatile market conditions which has reduced and may continue to reduce our adjusted gross profit margins as we honor our contractual freight rates.

SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS

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

The following summarizes select first quarter 2022 year-over-year operating comparisons to the first quarter 2021:

• Total revenues increased 41.9 percent to $6.8 billion, driven primarily by higher pricing and higher volume across most of our services.

• Gross profits increased 29.1 percent to $900.5 million.

Adjusted gross profits increased 43.3 percent to $844.2 million, primarily driven by higher adjusted gross profit per transaction and higher volume across most of our services.

• Personnel expenses increased 32.0 percent to $399.9 million, primarily due to higher incentive compensation costs and also due to the benefit realized in the third quarter of 2020 from our short-term, pandemic-related cost reductions.

Adjusted gross profits increased 29.0 percent to $906.2 million, primarily due to higher adjusted gross profit per transaction and higher volume across most of our services.

• Personnel expenses increased 14.6 percent to $413.4 million, primarily due to higher headcount.

Average headcount increased 15.1 percent.

• Other selling, general, and administrative (“SG&A”) expenses increased 13.0 percent to $133.5 million, primarily due to the benefit realized in the third quarter of 2020 from our short-term, pandemic-related cost reductions.

• Income from operations totaled $310.8 million, up 84.7 percent due to the increase in adjusted gross profits.

• Other selling, general, and administrative (“SG&A”) expenses increased 24.7 percent to $147.4 million, primarily due to higher purchased and contracted services, a non-recurring legal expense, and increased travel expenses.

• Income from operations totaled $345.5 million, up 54.7 percent due to the increase in adjusted gross profits, partially offset by the increase in operating expenses.

• Adjusted operating margin of 38.1 percent increased 630 basis points.

• Interest and other expenses totaled $16.7 million, consisting primarily of $13.1 million of interest expense, which increased $1.2 million versus last year due to a higher average debt balance.

The third quarter also included a $3.8 million unfavorable impact from foreign currency revaluation and realized foreign currency gains and losses.

• The effective tax rate in the quarter was 16.0 percent compared to 15.1 percent in the third quarter last year.

The rate increase was due primarily to a lower tax benefit related to stock-based compensation.

• Interest and other income/expenses totaled $14.2 million, consisting primarily of $14.5 million of interest expense, which increased $2.3 million versus last year due to a higher average debt balance.

• The effective tax rate in the quarter was 18.4 percent compared to 18.3 percent in the first quarter last year.

• Diluted earnings per share (EPS) increased 60.2 percent to $2.05.

• Cash flow from operations decreased $317.9 million driven by a large increase in working capital as of September 30, 2021.

• Cash flow from operations improved $42.8 million.

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,

2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

2022 2021 % change

Transportation $ 6,528,351 $ 4,560,227 43.2 %

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Income from operations 345,474 223,329 54.7 %

Interest and other expense (16,662) (7,465) 123.2 % (41,419) (32,904) 25.9 %

Interest and other income/expense, net (14,174) (11,260) 25.9 %

Income before provision for income taxes 331,300 212,069 56.2 %

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Adjusted gross profit margin percentage (1)

Transportation 13.7 % 14.4 % (70 bps) 14.0 % 15.6 % (160 bps)

Sourcing 9.4 % 8.2 % 120 bps 9.5 % 9.4 % 10 bps

Total adjusted gross profit margin 13.5 % 13.9 % (40 bps) 13.8 % 15.2 % (140 bps)

Transportation 13.5 % 14.9 % (140 bps)

Sourcing 9.8 % 9.6 % 20 bps

Total adjusted gross profit margin 13.3 % 14.6 % (130 bps)

________________________________

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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 September 30, 2021 Compared to the Three Months Ended September 30, 2020

Total revenues and direct costs.

Total transportation revenues and purchased transportation and related services increased significantly, primarily driven by higher pricing in ocean and truckload, in addition to increased volumes in nearly all services.

The higher pricing was driven by the continued supply chain disruptions impacting both the global forwarding and surface transportation market discussed above in the market and business trends sections.

Our sourcing total revenue and purchased products sourced for resale decreased as a result of a decrease in case volume with retail customers.

Gross profits and adjusted gross profits.

Our transportation adjusted gross profit increased due to increased pricing in ocean and truckload services resulting in higher adjusted gross profits per transaction in addition to volume increases in nearly all services.

Our transportation adjusted gross profit margin decreased driven by the increased cost of purchased transportation in all of our service lines.

Sourcing adjusted gross profits increased driven by an increase in case volume from sourcing managed procurement customers in the food service industry as the prior year period experienced a significant decrease in demand resulting from the COVID-19 pandemic.

This increase was partially offset by a decrease in case volume with retail customers.

Operating expenses.

Personnel expenses increased primarily due to incentive compensation increases reflecting the strong results in the current period, an increase in average headcount, and the impact of steps taken to reduce costs in response to the COVID-19 pandemic in the prior period, including furloughs, reduced work hours, and the temporary suspension of the company match to retirement plans for U.S.

and Canadian employees.

Stock-based compensation expense recognized on performance-based equity awards granted prior to 2021 totaled $22.7 million in the current period compared to none in the prior period.

SG&A expenses increased due to increased purchased services primarily due to the impact of short-term pandemic-related cost reductions in the prior year period.

Interest and other expense.

Interest and other expense primarily consisted of interest expense of $13.1 million in the third quarter of 2021 and a $3.8 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Interest expense increased driven by a higher average debt balance in the third quarter of 2021 compared to the third quarter of 2020.

The third quarter of 2020 included a $3.3 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Provision for income taxes.

Our effective income tax rate was 16.0 percent for the third quarter of 2021 compared to 15.1 percent for the third quarter of 2020.

The effective income tax rate for the third quarter of 2021 was lower than the statutory federal income tax rate primarily due to a lower tax rate on foreign earnings which decreased our effective tax rate by 4.2 percentage points in the third quarter of 2021.

The effective income tax rate for the third quarter of 2020 was lower than the statutory federal income tax rate primarily due to foreign tax credits 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.

Consolidated Results of Operations—Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

Consolidated Results of Operations—Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Total revenues and direct costs.

Total transportation revenues and purchased transportation and related services increased driven by higher pricing in nearly all services, most notably in truckload and ocean services.

Volumes also increased in nearly all services, most notably in ocean, air freight and LTL services.

The increased pricing in truckload and ocean has been driven by strong demand in addition to tight truckload carrier capacity and unprecedented supply chain disruptions in the ocean freight industry.

Our sourcing total revenue and purchased products sourced for resale decreased as a result of a decrease in case volume with retail customers.

Total transportation revenues and purchased transportation and related services increased significantly, primarily due to higher pricing in ocean and truckload, in addition to increased volumes most notably in truckload and ocean services.

The higher pricing was driven by the continued supply chain disruptions impacting both global forwarding and surface transportation markets discussed above in the market and business trends sections.

Our sourcing total revenue and purchased products sourced for resale increased as a result of higher cost and pricing per case and increased case volume across all customer verticals.

Gross profits and adjusted gross profits.

Our transportation adjusted gross profits increased driven by increased pricing in ocean and truckload services resulting in higher adjusted gross profits per transaction in addition to volume increases in our ocean, LTL, and air freight services.

Our transportation adjusted gross profits increased due to increased pricing in ocean, truckload and LTL services resulting in higher adjusted gross profits per transaction in addition to volume increases in truckload and ocean services.

Our transportation adjusted gross profit margin decreased driven by the increased cost of purchased transportation in all of our service lines.

Sourcing adjusted gross profits decreased slightly driven by lower adjusted gross profits per case, partially offset by increased case volume from customers in the food service industry which experienced a significant decrease in demand resulting from the COVID-19 pandemic in the prior year.

Sourcing adjusted gross profits increased driven by an increase in case volume across all customer verticals.

Operating expenses.

Personnel expenses increased primarily due to incentive compensation increases reflecting the strong results in the current year, an increase in average headcount, and the impact of steps taken to reduce costs in response to the COVID-19 pandemic in the prior year, including furloughs, reduced work hours, and the temporary suspension of the company match to retirement plans for U.S.

and Canadian employees in addition to increased health insurance costs.

Stock-based compensation expense recognized on performance-based equity awards granted prior to 2021 totaled $42.4 million in the current year compared to none in the prior year.

SG&A expenses increased primarily due to increased purchased services driven by the impact of short-term pandemic-related cost reductions in the prior year period, partially offset by lower credit losses in the current year.

The prior year also included an $11.5 million loss on the sale-leaseback of a company owned data center.

Interest and other expense.

Interest and other expense primarily consisted of interest expense of $38.0 million and a $8.6 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses in the nine months ended September 30, 2021.

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 increased driven by a higher average debt balance compared to the nine months ended September 30, 2020.

The nine months ended September 30, 2020 included a $2.2 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Personnel expenses increased primarily due to an increase in salaries and incentive compensation driven by an increase in average headcount.

SG&A expenses increased due to increased purchased services including temporary labor in addition to higher claims and credit losses, warehouse and travel expense.

Interest and other income/expense.

Interest and other income/expense primarily consisted of interest expense of $14.5 million in the first quarter of 2022 and a $1.5 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses.

Interest expense increased driven by a higher average debt balance in the first quarter of 2022 compared to the first quarter of 2021.

The first quarter of 2021 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 18.5 percent for the nine months ended September 30, 2021 and 17.3 percent for the nine months ended September 30, 2020.

The effective income tax rate for the nine months ended September 30, 2021 was lower than the statutory federal income tax rate primarily due to a lower tax rate on foreign earnings which reduced the effective tax rate by 1.5 percentage points and the combined tax impact of Global Intangible Low-tax Income ("GILTI") and Foreign Derived Intangible Income ("FDII"), which reduced the effective tax rate by 1.3 percentage

These impacts were partially offset by state income tax expense, net of federal benefit, which increased the effective income t ax rate.

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 company's prior Chief Executive Officer in 2000, which reduced the rate by 4.1 percentage points, in addition to foreign tax credits which reduced the rate by 3.1 percentage points.

Our effective income tax rate was 18.4 percent for the first quarter of 2022 compared to 18.3 percent for the first quarter of 2021.

The effective income tax rate for the first quarter of 2022 was lower than the statutory federal income tax rate primarily due to the tax impact of U.S.

tax credits and incentives, which reduced the effective tax rate by 1.9 percentage points, and the tax impact of share-based payment awards, which reduced the effective tax rate by 1.3 percentage points.

These impacts were partially offset by the impact of our estimated annual effective tax rate on the first quarter of 2022.

The effective income tax rate for the first quarter of 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 first quarter of 2021 by 1.7 percentage points.

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

NAST Segment Results of Operations

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

(dollars in thousands) 2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

(dollars in thousands) 2022 2021 % change

Total revenues $ 4,114,889 $ 3,211,423 28.1 %

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Income from operations $ 182,354 $ 136,784 33.3 %

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

2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

2022 2021 % change

Average headcount 7,348 6,537 12.4 %

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Truckload 4.0 %

LTL 1.0 % 12.5 %

Adjusted gross profits (1)

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

Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020

Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

Total revenues and direct costs.

NAST total revenues increased primarily driven by higher truckload and LTL pricing and an increase in truckload and LTL volumes.

Truckload pricing has remained at historic levels during the third quarter of 2021 driven by tight carrier capacity caused by driver availability challenges and the supply chain disruptions facing the industry as discussed above in the market trends section.

Total purchased transportation and related services increased, driven by higher average truckload linehaul costs per mile and, to a lesser extent, higher purchased transportation costs per transaction in LTL services and volume increases in both truckload and LTL services.

NAST total revenues increased primarily due to higher truckload and LTL pricing and an increase in truckload volumes.

Truckload pricing has remained at historic levels during the first quarter of 2022 due to tight carrier capacity caused by driver availability challenges and the supply chain disruptions facing the industry, as discussed above in the market trends section.

Despite remaining well above historic levels, we did start to see truckload purchased transportation costs and pricing decline within the first quarter of 2022 driven by moderating demand and capacity entering the market.

Total purchased transportation and related services increased, due to higher average truckload linehaul costs per mile and, to a lesser extent, higher purchased transportation costs per transaction in LTL services and volume increases in truckload services.

Gross profits and adjusted gross profits.

NAST truckload adjusted gross profits increased driven primarily by increased pricing resulting in higher adjusted gross profits per transaction in addition to an increase in volume.

The increased adjusted gross profit per transaction 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 27.0 percent in the third quarter of 2021 compared to the third quarter of 2020.

NAST truckload adjusted gross profits increased due primarily to increased pricing resulting in higher adjusted gross profits per transaction, in addition to an increase in volume.

The increased adjusted gross profit per transaction in truckload was the result of the continued progress repricing our contractual truckload business to reflect the elevated cost environment and the impact of softening market conditions, as our percentage of shipments with a negative adjusted gross profit margin decreased significantly in the first quarter of 2022.

Our average truckload linehaul rate per mile charged to our customers, which excludes fuel surcharges, increased approximately 20.5 percent in the first quarter of 2022 compared to the first quarter of 2021.

Our truckload transportation costs, excluding fuel surcharges, increased approximately 21.0 percent.

NAST LTL adjusted gross profits increased due to higher adjusted gross profits per transaction resulting from higher pricing and an increase in volumes.

NAST other adjusted gross profits decreased driven by lower adjusted gross profits per transaction and volume in intermodal.

NAST LTL adjusted gross profits increased due to higher adjusted gross profits per transaction resulting from higher pricing.

Operating expenses.

NAST personnel expenses increased primarily due to incentive compensation increases reflecting the strong results in the current period, an increase in average headcount, and the impact of steps taken to reduce costs in response to the COVID-19 pandemic in the prior period, including furloughs, reduced work hours, and the temporary suspension of the company match to retirement plans for U.S.

and Canadian employees.

NAST SG&A expenses increased driven by increased investments in technology and increased warehouse expenses and purchased services.

NAST personnel expenses increased primarily due to an increase in salaries and incentive compensation driven by an increase in average headcount.

NAST SG&A expenses increased due to increased investments in technology, a non-recurring legal expense, and increased expenditures for purchased services including temporary labor.

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

Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

Total revenues and direct costs.

NAST total revenues increased due to higher pricing in truckload and, to a lesser extent, higher pricing in LTL services in addition to volume increases in both LTL and truckload services.

The increased pricing in truckload has been driven by tight carrier capacity caused by driver availability challenges and the supply chain disruptions facing the industry as discussed above in the market and business trends section.

The prior year was adversely impacted by weakening demand during the early stages of the COVID-19 pandemic which resulted in industry volume decreases.

Total purchased transportation and related services increased, driven by higher average truckload linehaul costs per mile in addition to higher purchased transportation costs per transaction in LTL services and volume increases in both LTL and truckload services.

Gross profits and adjusted gross profits.

NAST truckload adjusted gross profits increased driven by increased adjusted gross profits per transaction due to the higher pricing discussed above.

Our average truckload linehaul rate per mile charged to our customers increased approximately 34.0 percent.

Our truckload transportation costs, excluding fuel costs, increased approximately 35.5 percent.

NAST LTL adjusted gross profits increased due to increased volumes.

NAST other adjusted gross profits decreased slightly as lower adjusted gross profits per transaction and lower volume in intermodal were mostly offset by incremental warehousing services related to the acquisition of Prime Distribution.

Operating expenses.

NAST personnel expense increased primarily due to incentive compensation increases reflecting the strong results in the current year and the impact of steps taken to reduce costs in response to the COVID-19 pandemic in the prior year, including furloughs, reduced work hours, and the temporary suspension of the company match to retirement plans for U.S.

and Canadian employees.

These increases were partially offset by a decrease in average headcount.

NAST SG&A expenses increased driven by increased investments in technology and increased warehouse expenses partially offset by a reduction in credit loss.

Allocated personnel expenses consist primarily of stock-based compensation allocated based upon segment participation levels in our equity plans.

Remaining corporate allocations, including corporate functions and technology related expenses, are primarily included within each segment’s other selling and administrative expenses and allocated based upon relevant segment operating metrics.

Global Forwarding Segment Results of Operations

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

(dollars in thousands) 2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

(dollars in thousands) 2022 2021 % change

Total revenues $ 2,194,397 $ 1,156,039 89.8 %

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Income from operations $ 167,638 $ 90,589 85.1 %

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

2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

2022 2021 % change

Average headcount 5,610 4,735 18.5 %

Service line volume statistics

Ocean 12.0 % 22.0 %

50.5 % 47.5 %

Customs 5.0 %

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

Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020

Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

Total revenues and direct costs.

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

Global Forwarding total revenues and direct costs increased due to higher pricing and volumes in our ocean services and, to a lesser extent, higher pricing and increased tonnage in air freight.

The higher ocean and air freight pricing and costs were driven by the continued supply chain disruptions impacting the global forwarding market discussed above in the market and business trends section.

Increased air freight volumes were driven by ocean freight conversions resulting from the significant disruptions experienced in the industry and the continued increase in charter flights and larger than normal shipment sizes as traditional air freight capacity remains strained by a reduction of commercial flights.

Gross profits and adjusted gross profits.

Ocean and air freight transportation adjusted gross profits increased driven by higher pricing resulting in higher adjusted gross profits per transaction in addition to an increase in volumes.

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

Operating expenses.

Personnel expenses increased primarily due to an increase in average headcount and incentive compensation increases reflecting the strong results in the current period.

The prior period included the impact of steps taken to reduce costs in response to the COVID-19 pandemic, including furloughs and reduced work hours.

SG&A expenses increased driven by increased investments in technology, partially offset by a reduction of amortization expense due to the completion of amortization related to intangible assets from a prior acquisition.

Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

Total revenues and direct costs.

Total revenues and direct costs increased driven by higher pricing and volumes in our ocean services and, to a lesser extent, higher pricing and volumes in our air freight services.

The increased ocean pricing was driven by the unprecedented supply chain disruptions impacting the industry combined with strong demand.

The first half of 2020 was also severely impacted by reduced demand and production due to the COVID-19 pandemic which led to significant volume declines in all services in the prior year.

Ocean volumes increased due to strong growth in North America and Europe more than offsetting a modest decline in Asia resulting from pandemic related shutdowns in China.

Air freight tonnage increased due to strong growth in all regions we serve.

Gross profits and adjusted gross profits.

Ocean and air freight transportation adjusted gross profits increased driven by higher pricing resulting in higher adjusted gross profits per transaction in addition to increased volumes.

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

Ocean and air freight transportation adjusted gross profits increased due to higher pricing resulting in higher adjusted gross profits per transaction, in addition to an increase in volumes.

Customs adjusted gross profits increased due to an increase in transaction volume and a higher mix of value-added services.

Operating expenses.

Personnel expenses increased primarily due to an increase in average headcount and incentive compensation increases reflecting the strong results in the current period.

The prior year included the impact of steps taken to reduce costs in response to the COVID-19 pandemic, including furloughs and reduced work hours.

SG&A expenses increased driven by increased investments in technology and increased purchased services, partially offset by a reduction of amortization expense due to the completion of amortization related to intangible assets from a prior acquisition.

Personnel expenses increased primarily due to an increase in salaries and incentive compensation driven by an increase in average headcount.

SG&A expenses increased due to increased investments in technology and increased purchased services including temporary labor.

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) 2021 2020 % change 2021 2020 % change

Three Months Ended March 31,

(dollars in thousands) 2022 2021 % change

Total revenues $ 506,667 $ 436,407 16.1 %

Income from operations (3,421) (586) N/M (6,165) (8,465) N/M

Income from operations (4,518) (4,044) N/M

Adjusted gross profits (1)

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

Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020

Total revenues were essentially flat driven by higher truckload pricing and volumes in Other Surface Transportation, including a 9.5 percentage point increase from the acquisition of Combinex, which was mostly offset by a decline in our Robinson Fresh business driven by a decrease in case volume with retail customers.

Robinson Fresh adjusted gross profits increased driven by an increase in case volume primarily from sourcing managed procurement customers in the food service industry as the prior year period experienced a significant decrease in demand resulting from the COVID-19 pandemic.

This increase was partially offset by a decrease in case volume with retail customers.

Managed Services adjusted gross profits increased driven by increased transaction volumes resulting from an increase in freight under management.

Other Surface Transportation adjusted gross profits increased as a result of higher adjusted gross profits per transaction and a 13.5 percentage point increase from the acquisition of Combinex.

Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

Total revenues increased driven by higher truckload pricing and volumes in Other Surface Transportation, including a 4.5 percentage point increase from the acquisition of Combinex partially offset by a decline in Robinson Fresh driven by lower pricing.

Robinson Fresh adjusted gross profits decreased slightly driven by lower adjusted gross profits per case, partially offset by increased case volume from customers in the food service industry which experienced a significant decrease in demand resulting from the COVID-19 pandemic in the prior year.

Managed Services adjusted gross profits increased driven by increased transaction volumes resulting from an increase in freight under management.

Other Surface Transportation adjusted gross profits increased primarily due to a 5.5 percentage point increase from the acquisition of Combinex.

Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

Total revenues and direct costs.

Robinson Fresh total revenues increased due to higher pricing per case and increased case volume across all customer verticals.

In addition, total revenues in Other Surface Transportation increased due to higher truckload pricing and volumes.

Gross profits and adjusted gross profits.

Robinson Fresh adjusted gross profits increased due to an increase in case volume across all customer verticals.

Managed Services adjusted gross profits increased due to an increase in freight under management, which was driven by growth with new and existing customers.

Other Surface Transportation adjusted gross profits increased as a result of higher adjusted gross profits per transaction.

LIQUIDITY AND CAPITAL RESOURCES

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

Description Carrying Value as of September 30, 2021 Borrowing Capacity Maturity

Description Carrying Value as of March 31, 2022 Borrowing Capacity Maturity

Revolving credit facility $ 572,000 $ 1,000,000 October 2023

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

Receivables securitization facility (1)

499,369 500,000 November 2023

Senior Notes (1)

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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 $202.6 million as of September 30, 2021 and $243.8 million as of December 31, 2020.

Cash and cash equivalents held outside the United States totaled $170.6 million as of September 30, 2021 and $230.9 million as of December 31, 2020.

Cash and cash equivalents totaled $242.8 million as of March 31, 2022 and $257.4 million as of December 31, 2021.

Cash and cash equivalents held outside the United States totaled $226.5 million as of March 31, 2022 and $217.1 million as of December 31, 2021.

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 % change

Sources (uses) of cash:

Cash provided by operating activities $ 19,100 $ 337,049 (94.3) %

Cash used for operating activities $ (13,928) $ (56,692) (75.4) %

Capital expenditures (26,229) (13,506)

Acquisitions, net of cash acquired (14,749) (223,230)

Other investing activities 2,250 —

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Cash dividends (72,855) (70,030)

Net borrowing (payments) on debt 629,701 (83,000)

Net borrowings on debt 247,000 250,000

Other financing activities 8,904 (3,003)

Cash provided by (used for) financing activities 9,911 (274,984) N/M

Cash provided by (used for) financing activities 21,770 46,763 (53.4) %

Effect of exchange rates on cash and cash equivalents 1,533 (2,750)

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Cash flow from operating activities.

Cash flow from operating activities decreased significantly during the nine months ended September 30, 2021 compared to the nine months ended September 30, 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 a sequential increase in pricing and volumes in nearly all services, most notably in global forwarding, during the third quarter of 2021.

Cash flow used for operating activities improved in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to increased net income, partially offset by 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 an increase in accounts payable and accrued transportation expense.

Both increases were driven by a sequential increase in pricing and volumes in nearly all services, most notably in global forwarding, during the first quarter of 2022.

The increase in accounts receivable was driven by our global forwarding business where our days sales outstanding ratio is approximately double that of our NAST business.

Despite the increase in accounts receivable, we are not experiencing a deterioration in the quality of our accounts receivables balance, and the results of the nine months ended September 30, 2021 include sequential and year-over-year improvements in 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.

Despite the increase in accounts receivable, we are not experiencing a deterioration in the quality of our accounts receivables balance, and the results of the three months ended March 31, 2022 include sequential and year-over-year improvements in the percent of accounts receivable that are past due.

Additionally, given the elevated price and cost environment resulting in an increasing accounts receivable balance, 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 hardware and software, 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 $14.7 million for the acquisition of Combinex during the nine months ended September 30, 2021.

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

Capital expenditures consisted primarily of investments in software, 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.

Subsequent to March 31, 2022, we sold an office building in Kansas City, Missouri, for a sales price of $55 million and expect to recognize a gain of approximately $25 million on the sale of the building in the three months ending June 30, 2022.

We simultaneously entered into an agreement to lease the office building for 10 years.

Cash used for financing activities.

Net borrowings on debt in the nine months ended September 30, 2021 were to fund working capital needs and share repurchases.

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

The increase in cash used for share repurchases was due to an increase in the number of shares repurchased during the nine months ended September 30, 2021 as we temporarily suspended our share repurchase activity in 2020 as we continued to assess the impacts of the COVID-19 pandemic.

Net borrowings on debt in the three months ended March 31, 2022 and the three months ended March 31, 2021 were to fund working capital needs and share repurchases.

The increase in cash used for share repurchases was due to an increase in the number of shares repurchased and a higher average price per share during the three months ended March 31, 2022.

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.

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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 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 and the foreseeable future.

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

As of September 30, 2021, we were in compliance with all of the covenants under the Credit Agreement, Note Purchase Agreement, and Senior Notes.

As of March 31, 2022, we were in compliance with all of the covenants under the Credit Agreement, Note Purchase Agreement, and Senior Notes, and the Receivables Securitization.

Recently Issued Accounting Pronouncements

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Refer to the company's 2021 Annual Report on Form 10-K for a complete discussion regarding our critical accounting policies and estimates.

As of September 30, 2021, there were no material changes to our critical accounting policies and estimates.

As of March 31, 2022, there were no material changes to our critical accounting policies and estimates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to the company’s 2021 Annual Report on Form 10-K for a discussion on the company’s market risk.

As of September 30, 2021, there were no material changes in market risk from those disclosed in the company’s 2020 Annual Report on Form 10-K.

As of March 31, 2022, there were no material changes in market risk from those disclosed in the company’s 2021 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