C. H. Robinson - 10-Q quarterly report FY

C.H. Robinson Worldwide, Inc. and its Subsidiaries (“the Company,” “we,” “us,” or “our”) is a leading global provider of multimodal transportation services and logistics solutions, operating through a network of 146 offices in North America, South America, Europe and Asia. The condensed consolidated financial statements include the accounts of C.H. Robinson Worldwide, Inc. and its majority owned and controlled subsidiaries. Minority interests in subsidiaries are not significant. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

The condensed consolidated financial statements, which are unaudited, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for the six months ended June 30, 2002 and 2001 are not necessarily indicative of results to be expected for the entire year. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. We adopted SFAS No. 142 effective January 1, 2002.

As of June 30, 2002, we had goodwill and other intangible assets of $157.4 million that are subject to the provisions of SFAS No. 142 consisting of $155.6 million of unamortizable goodwill and intangible assets and $1.8 million of other amortizable intangible assets. We completed an impairment test to determine the impact of adopting SFAS No. 142 on our earnings and financial position. This impairment test did not result in any impairment losses. Had SFAS No. 141 and 142 been effective January 1, 2001, net income and earnings per share would have been reported as the following amounts (in thousands, except per share data):

Amortization expense for the three month and six month periods ended June 30, 2002 was $188,000 and $376,000 respectively. Estimated amortization expense for each of the five succeeding fiscal years based on the intangible assets as of June 30, 2002 is as follows:

In August 2001, the FASB issued SFAS No. 143 (SFAS 143),Accounting for Asset Retirement Obligations, which is effective January 1, 2003. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We are currently in the process of evaluating this standard but do not believe that adoption will have an effect on our consolidated results of operations, financial position or cash flows.

In September 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that statement. The adoption of this standard on January 1, 2002 did not have an effect on our historical consolidated results of operations, financial position and cash flows.

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto.

Gross revenues represent the total dollar value of services and goods we sell to our customers. Our costs of transportation and products include the contracted direct costs of transportation, including motor carrier, rail, ocean, air, and other costs, and the purchase price of the products we source. We act principally as a service provider to add value and expertise in the execution and procurement of these services for our customers. Our gross profit (gross revenues less the direct cost of transportation, products, and handling) is the primary indicator of our ability to source, add value and resell services and products that are provided by third parties, and is considered by management to be our primary performance measurement. Accordingly, the discussion of results of operations below focuses on the changes in our gross profit. Prior to our 2001 Annual Report filed on Form 10-K, gross profit was referred to as net revenues in our financial statements, company materials, and reports filed with the SEC.

In the transportation industry, results of operations generally show a seasonal pattern as customers reduce shipments during and after the winter holiday season. In recent years, our income from operations has been lower in the first quarter than in the other three quarters. Seasonality in the transportation industry has not had a significant impact on our results of operations or our cash flows in recent years. Also, inflation has not materially affected our operations due to the short-term, transactional basis of our business. However, we cannot fully predict the impact seasonality and inflation may have in the future.

The following table summarizes our gross profit by service line:

The following table represents certain statement of operations data shown as percentages of our gross profit:

Revenues.    Gross revenues for the three months ended June 30, 2002 were $842.7 million, an increase of 5.8% over gross revenues of $796.7 million for the three months ended June 30, 2001. Gross profit for the three months ended June 30, 2002 was $121.6 million, an increase of 3.0% over gross profit of $118.0 million for the three months ended June 30, 2001. This was a result of an increase in transportation services gross profit of 1.7% to

Transportation gross profit was 83.9% of our total gross profit for the quarter. Our transportation gross profit increased 1.7% as a result of gross profit increases in our intermodal, international and transportation management businesses, combined with a 0.3% decline in the company’s truck transportation business. We had slight increases in truck volume during the quarter, but experienced a decrease in our gross profit per transaction.

Sourcing gross profit increased 4.7% in the second quarter. We continue to see the trend of less volume with our traditional business with produce wholesalers, which is offset by increases in volumes and gross profit with large retailers.

Information services gross profit increased 25.5% for the second quarter. T-Chek related profit, which as of July 1, 2001 comprised 100% of information services, increased 27.6% during the quarter. This increase was caused by both an increase in volume and an increase in average fees per transaction.

Selling, General, and Administrative Expenses.    Personnel expenses for the three months ended June 30, 2002 were $58.6 million, an increase of 3.9% over personnel expenses of $56.4 million for the three months ended June 30, 2001. Personnel expenses as a percentage of gross profit increased to 48.2% for the three months ended June 30, 2002 compared to 47.8% for the three months ended June 30, 2001 due to an increase in headcount and health insurance costs.

Other selling, general, and administrative expenses for the three months ended June 30, 2002 were $22.0 million, a decrease of 12.1% from $25.0 million for the three months ended June 30, 2001. Amortization of goodwill and certain intangible assets has been eliminated due to the adoption of a new accounting standard effective January 1, 2002, which reduced amortization expense by $1.3 million in the second quarter. In addition, we had notable declines in communications costs, travel expenses, and contractor costs.

Income from Operations.    Income from operations was $41.0 million for the three months ended June 30, 2002, an increase of 12.1% over $36.6 million for the three months ended June 30, 2001. Income from operations as a percentage of gross profit was 33.7% and 31.0% for the three months ended June 30, 2002 and 2001.

Investment and Other Income.    Investment and other income was $0.4 million for the three months ended June 30, 2002, a decrease of 52.4% from $0.7 million for the three months ended June 30, 2001. This is due to a decline in interest rates associated with our short-term investments.

Provision for Income Taxes.    Our effective income tax rates were 39.0% and 39.3% for the three months ended June 30, 2002 and 2001. The effective income tax rate for both periods is greater than the statutory federal income tax rate primarily due to state income taxes, net of federal benefit.

Net Income.    Net income was $25.2 million for the three months ended June 30, 2002, an increase of 11.3% over $22.6 million for the three months ended June 30, 2001. Basic net income per share increased by 11.1% to $0.30 from $0.27 per share in 2001. Diluted net income per share increased 11.5% to $0.29 from $0.26 per share in 2001.

Revenues.    Gross revenues for the six months ended June 30, 2002 were $1.58 billion, an increase of 3.5% over gross revenues of $1.53 billion for the six months ended June 30, 2001. Gross profit for the six months ended June 30, 2002 was $235.2 million, an increase of 1.7% over gross profit of $231.3 million for the six months ended June 30, 2001. This was a result of an increase in transportation services gross profit of 0.8% to $198.6 million, an increase in sourcing gross profit of 1.6% to $24.3 million and an increase in information services gross profit of 19.3% to $12.2 million. Our gross profit typically grows at a different rate than our gross revenues due to the mix of services we provide.

Transportation gross profit was 84.5% of our total gross profit for the period. Our transportation gross profit increased 0.8% during the six months ended June 30, 2002. The increase was the result of gross profit increases in intermodal and international, combined with a 0.8% decline in the company’s truck transportation business. We had slight increases in truck volume during the period, but experienced a decrease in our gross profit per transaction.

Sourcing gross profit increased 1.6% during the six months ended June 30, 2002. We continue to see the trend of less volume with our traditional business with produce wholesalers, which is offset by increases in volumes and gross profit with large retailers.

Information services gross profit increased 19.3% for the six months ended June 30, 2002. T-Chek related profit, which as of July 1, 2001 comprised 100% of information services, increased 23.6% during the period. This increase was caused by both an increase in volume and an increase in average fees per transaction.

Selling, General, and Administrative Expenses.    Personnel expenses for the six months ended June 30, 2002 were $117.5 million, an increase of 3.4% over personnel expenses of $113.7 million for the six months ended June 30, 2001. Personnel expenses as a percentage of gross profit increased to 50.0% for the six months ended June 30, 2002 compared to 49.2% for the six months ended June 30, 2001 due to an increase in headcount and health insurance costs.

Other selling, general, and administrative expenses for the six months ended June 30, 2002 were $42.8 million, a decrease of 17.1% from $51.7 million for the six months ended June 30, 2001. Amortization of goodwill and certain intangible assets has been eliminated due to the adoption of a new accounting standard effective January 1, 2002, which reduced amortization expense by $2.6 million for the six months ended June 30, 2002. In addition, we had notable declines in communications costs, travel expenses, and contractor costs.

Income from Operations.    Income from operations was $74.8 million for the six months ended June 30, 2002, an increase of 13.5% over $65.9 million for the six months ended June 30, 2001. Income from operations as a percentage of gross profit was 31.8% and 28.5% for the six months ended June 30, 2002 and 2001.

Investment and Other Income.    Investment and other income was $0.7 million for the six months ended June 30, 2002, a decrease of 45.4% from $1.2 million for the six months ended June 30, 2001. This is due to a decline in interest rates associated with our short-term investments.

Provision for Income Taxes.    Our effective income tax rates were 39.0% and 39.3% for the six months ended June 30, 2002 and 2001. The effective income tax rate for both periods is greater than the statutory federal income tax rate primarily due to state income taxes, net of federal benefit.

Net Income.    Net income was $46.0 million for the six months ended June 30, 2002, an increase of 12.9% over $40.8 million for the six months ended June 30, 2001. Basic net income per share increased by 14.6% to $0.55 from $0.48 per share in 2001. Diluted net income per share increased 12.5% to $0.54 from $0.48 per share in 2001.

We have historically generated substantial cash from operations which has enabled us to fund our growth while paying cash dividends and repurchasing stock. Cash and cash equivalents totaled $124.7 million and $115.7 million as of June 30, 2002 and December 31, 2001.

We generated $40.9 million and $8.5 million of cash flow from operations for the six months ended June 30, 2002 and 2001. Our operating cash flows were reduced during the first six months of 2001 as a result of closing our freight payment company. This company had a positive cash balance of $22 million as of December 31, 2000 and was closed in early June 2001.

We used $20.6 million and $4.8 million of cash and cash equivalents for investing activities for the six months ended June 30, 2002 and 2001. In January 2002, we acquired the operating assets and certain liabilities of

We used $11.3 million and $12.0 million of cash and cash equivalents for financing activities for the six months ended June 30, 2002 and 2001, primarily to pay quarterly cash dividends and to repurchase common stock. We declared a $0.06 per share dividend payable to shareholders of record as of June 7, 2002 that was paid on July 1, 2002.

We had a $40.0 million line of credit at an interest rate of LIBOR plus 60 basis points, which we terminated during the third quarter of 2001. During 2001, we borrowed $9.0 million on one day, all of which was repaid the following business day. We believe we could obtain a similar line of credit on short notice if needed.

We also have 3 million Euros (formerly denominated in French francs) available under a line of credit at an interest rate of Euribor plus 45 basis points (3.84% at June 30, 2002). This discretionary line of credit has no expiration date. As of June 30, 2002, we had no outstanding balance on this facility. As of June 30, 2001, the outstanding balance was 14.9 million French francs or $1.9 million, which is included in income taxes and other current liabilities. Our credit agreement contains certain financial covenants, but does not restrict the payment of dividends. We were in compliance with all covenants of this agreement as of June 30, 2002.

Assuming no change in our current business plan, management believes that our available cash, together with expected future cash generated from operations and the amounts available under our line of credit, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures and cash dividends for all future periods.

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2001 Annual Report on Form 10-K. The accounting policies used in preparing our interim 2002 condensed consolidated financial statements are the same as those described in our annual report, except as described in Note 2 of this report, “New Accounting Pronouncements,” which we consider to be one of our critical accounting policies.

In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. Our critical accounting policies include those related to the collectibility of accounts receivable, revenue recognition, and the evaluation of long-lived assets, including goodwill, for impairment.

See Note 2 of the notes to the condensed consolidated financial statements for a discussion on new accounting pronouncements.

We had approximately $124.7 million of cash and investments on June 30, 2002, all of which were cash and cash equivalents. Substantially all of the cash equivalents are money market securities from domestic issuers or bonds maturing in less than sixty days. Because of the credit risk criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. A rise in interest rates could negatively affect the fair value of our investments. We believe a reasonable near-term change in interest rates would not have a material impact on our future earnings due to the short-term nature of our investing practices.

Our discussions and analysis of our financial condition and results of operations, including our market risk discussions, contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs, including, but not limited to, our current assumptions about future financial performance, anticipated problems and our plans for future operations, which are subject to various risks and uncertainties. When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer of the Company, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including those described in Exhibit 99 to our Form 10-K filed with the Securities and Exchange Commission with respect to the fiscal year ended December 31, 2001.

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The Annual Meeting of the Company’s stockholders was held on May 7, 2002. At the meeting, stockholders voted on the reelection of two directors for terms expiring at the Annual Meeting of the Company in 2005. Each of the directors was reelected by a vote as follows: Robert Ezrilov received 75,486,079 votes “For” and 1,343,124 votes were “Withheld;” and Wayne M. Fortun received 75,615,575 votes “For” and 1,213,628 votes were “Withheld.”

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A report on Form 8-K was filed by the Company on April 23, 2002; such report contained information under Item 9 (Regulation FD) and included as an exhibit under Item 7 a copy of the Company’s earnings release for the quarter ended March 31, 2002.

A report on Form 8-K was filed by the Company on June 20, 2002, reporting on the June 18, 2002 appointment by the Company’s Board of Directors of Deloitte & Touche LLP as the Company’s independent public accountants for the fiscal year ending December 31, 2002, replacing Arthur Anderson LLP. The report includes as Exhibit 16, a letter dated June 18, 2002, from Arthur Andersen LLP to the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:    August 13, 2002