You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes. FORWARD-LOOKING INFORMATION Our quarterly report on Form 10-Q, including this discussion and analysis of our financial condition and results of operations and our disclosures about market risk, contains certain "forward-looking statements." These statements represent our expectations, beliefs, intentions, or strategies concerning future events that, by their nature, involve risks and uncertainties. Forward-looking statements include, among others, statements about our future performance, the continuation of historical trends, the sufficiency of our sources of capital for future needs, the effects of acquisitions or dispositions, the expected impact of recently issued accounting pronouncements, and the outcome or effects of litigation. Risks that could cause actual results to differ materially from our current expectations include, but are not limited to, changes in economic conditions, including uncertain consumer demand; changes in market demand and pressures on the pricing for our services; changes due to catastrophic events including pandemics such as COVID-19; competition and growth rates within the third party logistics industry; freight levels and increasing costs and availability of truck capacity or alternative means of transporting freight; changes in relationships with existing contracted truck, rail, ocean, and air carriers; changes in our customer base due to possible consolidation among our customers; our ability to successfully integrate the operations of acquired companies with our historic operations; risks associated with litigation, including contingent auto liability and insurance coverage; risks associated with operations outside ofthe United States ; risks associated with the potential impact of changes in government regulations; risks associated with the produce industry, including food safety and contamination issues; fuel price increases or decreases, or fuel shortages; cyber-security related risks; the impact of war on the economy; changes to our capital structure; risks related to the elimination of LIBOR; and other risks and uncertainties detailed in our Annual and Quarterly Reports. Therefore, actual results may differ materially from our expectations based on these and other risks and uncertainties, including those described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 19, 2020 as well as the updates to these risk factors included in Part II-"Item 1A, Risk Factors," herein. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update such statement to reflect events or circumstances arising after such date. OVERVIEWC.H. Robinson Worldwide, Inc. ("C.H. Robinson," "the company," "we," "us," or "our") is one of the largest third party logistics companies in the world. As a third party logistics provider, we enter into contractual relationships with a wide variety of transportation companies and utilize those relationships to efficiently and cost-effectively arrange the transport of our customers' freight. We provide freight transportation services and logistics solutions to companies of all sizes, in a wide variety of industries. We operate through a network of offices inNorth America ,Europe ,Asia ,Oceania , andSouth 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. 22 -------------------------------------------------------------------------------- Table of Contents Our net revenues are a non-GAAP financial measure calculated as total revenues less the cost of purchased transportation and related services and the cost of purchased products sourced for resale. We believe net revenues are a useful measure of our ability to source, add value, and sell services and products that are provided by third parties, and we consider net revenues to be our primary performance measurement. Accordingly, the discussion of our results of operations often focuses on the changes in our net revenues. The reconciliation of total revenues to net revenues is presented below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Transportation$ 3,944,981 $ 3,608,346 $ 10,835,710 $ 10,751,890 Sourcing 279,819 247,786 821,944 764,292 Total revenues 4,224,800 3,856,132 11,657,654 11,516,182 Costs and expenses: Purchased transportation and related services 3,378,651 2,999,979 9,141,354 8,826,233 Purchased products sourced for resale 256,876 222,722 744,621 682,502 Total costs and expenses 3,635,527 3,222,701 9,885,975 9,508,735 Net revenues $ 589,273$ 633,431 $ 1,771,679 $ 2,007,447 MARKET TRENDS The North American surface transportation market experienced increasing sequential demand during the third quarter of 2020 despite many small to mid-sized companies and certain industries continuing to experience demand below historical levels due to the COVID-19 pandemic. The improving demand during the third quarter of 2020 was most pronounced with large companies and from the retail and food and beverage industries. The impact of increasing consumer demand and production resulted in tighter carrier capacity and led to an increase in purchased transportation pricing. Industry freight volumes, as measured by the Cass Freight Index, declined approximately 8 percent during the third quarter of 2020 compared to the third quarter of 2019 although they did increase sequentially during the third quarter of 2020. One of the metrics we use to measure market conditions is the truckload routing guide depth from our Managed Services business. Routing guide depth represents the number of carriers contacted prior to an acceptance when procuring a transportation provider. The average routing guide depth of tender in the third quarter of 2020 was 1.6, representing that on average, the first or second carrier in a shipper's routing guide was executing the shipment in most cases. This routing guide penetration compares to 1.2 in both the first and second quarters of 2020 and is reflective of the increasing consumer demand and production and the tightening carrier capacity evident in the third quarter of 2020. This caused routing guides to rapidly degrade and more loads to move to the spot market driving sharp increases in transportation costs. The global forwarding market also showed signs of improvement during the third quarter of 2020 after multiple quarters of reduced demand and production resulting in decreased volumes due to the COVID-19 pandemic. Many companies began to replenish low inventory levels amidst continued market uncertainty from the COVID-19 pandemic. Both the airfreight and ocean market experienced significant pricing increases in the third quarter of 2020 compared to the third quarter of 2019 resulting from reduced capacity. In the airfreight market, a reduction in commercial flights resulted in an increase in charter flights and larger than normal shipment sizes due to the COVID-19 pandemic. In the ocean freight market, sequential demand accelerated faster than carrier capacity returned to the market, resulting in significant pricing increases. BUSINESS TRENDS Our third quarter of 2020 surface transportation results are largely consistent with the overall market trends summarized above, although we did experience volume increases in excess of the industry trends as measured by the Cass Freight Index. Despite industry freight volumes declining approximately 8 percent, our NAST truckload and LTL volumes increased 0.5 percent and 13.5 percent, respectively, which is reflective of our pricing strategies to ensure we are near the top of our customers' routing guides. We continued to work with our customers to meet our contractual commitments during the third quarter of 2020 while adapting our pricing to reflect the volatile cost of transportation pricing seen since the beginning of the COVID-19 pandemic while also serving customers' needs in the spot market. This resulted in an increase in average truckload linehaul rates per mile, excluding fuel costs, charged to customers although our truckload transportation costs, excluding fuel prices, increased at a faster rate resulting in margin compression. 23 -------------------------------------------------------------------------------- Table of Contents 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. OnMarch 2, 2020 , we acquired all of the outstanding shares ofPrime Distribution Services ("Prime Distribution"), a leading provider of retail consolidation services inNorth 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 ofFebruary 29, 2020 , and therefore the results of operations of Prime Distribution have been included as part of the North American Surface Transportation segment in our consolidated financial statements sinceMarch 1, 2020 . SIGNIFICANT DEVELOPMENTS During the three and nine months endedSeptember 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 19, 2020 . The extent to which the COVID-19 pandemic impacts our financial results and operations for the remainder of 2020 and going forward will depend on future developments which are highly uncertain and cannot be predicted, including fluctuations in the severity of the outbreak and the actions being taken to contain and treat it. We have taken a variety of measures to ensure the availability, continuity, and security of our critical infrastructure, ensure the health and safety of our employees around the globe, and provide service and supply chain continuity to our customers and contracted carriers in order to deliver critical and essential goods and services. We continue to follow public and private sector policies and initiatives to reduce the transmission of COVID-19, such as requiring social distancing, wearing a mask, and limiting the number of employees to less than 50 percent capacity when in the office, in addition to the elimination of all non-essential travel. We have also adopted work-from-home arrangements, and as ofSeptember 30, 2020 , over 80 percent of our employees were working remotely executing their duties and responsibilities. We do not believe these policies and initiatives will adversely impact our operations. In addition, we have taken steps across the organization to reduce costs, including the elimination of all non-essential travel, temporary salary reductions for company executive officers, temporary reductions in cash retainers for board members, temporary suspension of the company match to retirement plans forU.S. and Canadian employees, accelerating the use of paid time off, and furloughing approximately seven percent of ourU.S and Canadian employees in the second quarter of 2020. As we continue to harness the benefits of our technology investment and network transformation, we have eliminated certain positions during the third quarter of 2020, and therefore, a portion of employees did not return from furlough. We recognized$4.4 million in severance during the third quarter of 2020 as a result of these reductions. Due to the ongoing uncertainty around the severity and duration of the outbreak, we are not able at this time to estimate the impact COVID-19 may have on our financial results and operations for the remainder of 2020 and going forward. However, the impact could be material in all business segments and could be material during any future period affected either directly or indirectly by this pandemic. Many businesses continue to experience reduced production and output which could result in a decrease in freight volumes across a number of industries which may reduce our contractual and spot-market opportunities. In addition, a significant number of our contracted carriers may reduce their capacity or charge higher prices in light of the volatile market conditions which may reduce our net revenue margins as we honor our contractual freight rates. SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS The following summarizes select third quarter 2020 year-over-year operating comparisons to third quarter 2019: •Total revenues increased 9.6 percent to$4.2 billion , driven primarily by higher pricing in most service lines, most notably in ocean and airfreight services, and higher volumes across most of our service lines. •Net revenues decreased 7.0 percent to$589.3 million , primarily driven by rising costs and lower margin in truckload services, partially offset by contributions from the acquisition of Prime Distribution and higher pricing in most of our service lines. •Personnel expenses decreased 5.5 percent to$302.9 million , driven primarily by cost reductions. Average headcount decreased 5.6 percent, despite the Prime acquisition contributing approximately two percentage points of growth. 24
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Table of Contents •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 inChicago, 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 endedSeptember 30, 2020 .
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