Third-party logistics provider C.H. Robinson Worldwide (NASDAQ:CHRW) reported higher revenue and net income Tuesday in its second-quarter 2015 earnings report, released after market close. The company's net revenue increased 12.1% from the prior year's quarter, to $584 million. Net income increased nearly 16%, to $137.2 million. Diluted earnings per share similarly rose 17.5%, to $0.90.
While most of the company's transportation modes saw volume increases during the quarter, the Truckload and LTL, or Less Than Truckload, segments provided the lion's share of net revenue improvement. C.H. Robinson defines "net revenue" as total revenue less subcontracted transportation and services. Truckload and LTL together supplied $50 million of the company's total $63 million net revenue increase.
The boost from trucking services stems from C.H. Robinson's January 2015 acquisition of Freightquote, the largest online freight brokerage in the U.S., for $365 million. Freightquote added 3.5 percentage points to the company's 8.6% increase in Truckload net revenue. More impressively, LTL net revenue expanded by $24 million, from $67.4 million to $91.5 million, and Freightquote was responsible for 33 percentage points out of the total 36% growth.
Overall, approximately 7 percentage points of the company's 12.2% total net revenue expansion during the quarter can be attributed to Freightquote, according to an investor presentation the company issued in advance of its earnings call, set for Wednesday July 29.
Impact of fuel prices on results
C.H. Robinson likes to track a performance metric it calls "transportation net revenue margin." This figure indicates how efficiently the company is managing the various expenses related to its transportation subcontracting. It's derived by dividing net transportation revenue by total transportation revenue.
To illustrate, the company's $548.3 million of transportation net revenue (which includes Truckload, LTL, and other modes such as Intermodal, Ocean, and Air) was derived from total transportation revenue of $3.1 billion. Thus, the transportation net revenue margin for the quarter was 17.5%.
Following is a table of recent trends in transportation net revenue margin the company released today alongside its earnings report:
The first two quarters of this year have kicked in ahead of the trend for the past three years. Both in Q1 and the current quarter, management has cited the effect of lower fuel prices on transportation net revenue margin. Lower fuel expense is helping C.H. Robinson take home more dollars from the total it charges its customers across various modes of transportation.
While this is certainly a boon to shareholders, as it leads to higher absolute profits and better cash flow, the net margin percentage may not increase substantially in subsequent quarters. That's because at some point later this year, fuel expense should begin to pass prices from late 2014, when the price of crude oil began its slide in earnest. Thus, to keep up the strong trend in net revenue margin, management may have to find other value-added efficiencies in its subcontracting activities in the near future.
Capital return strategy and current debt levels
C.H. Robinson continues to produce vigorous cash flow. The company improved on its first-quarter operating cash-flow generation of $101.4 million by nearly 50%, turning out cash from operations of $150.0 million during the second quarter. The logistics provider has in recent years returned nearly all its excess cash flow to shareholders. Year to date, C.H. Robinson has paid out $114.5 million in dividends (the current yield stands at 2.4%) and repurchased $93 million of its stock on the open market.
Between dividends and share buybacks, the company's return on capital is equal to 85% of net income so far this year, a pace that's on track to equal 2014's 87% return of net income to shareholders.
The commitment to shareholder-friendly actions means that C.H. Robinson will probably maintain for some time a portion of debt related to recent acquisitions. Both the Freightquote deal and the purchase of Phoenix International Freight Services in late 2012 have bulked up long-term debt (including the current portion) on the company's balance sheet, which now stands at $1.1 billion.
Maintaining these debt levels while returning excess cash to investors appears to come at a reasonable cost for now. The company has booked $15.5 million in interest expense year to date, which is equivalent to roughly 6% of net income. The current debt load isn't likely to decrease soon, and it could possibly increase, should C.H. Robinson locate another acquisition candidate with the promise of Freightquote.