Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our company. We are a global provider of transportation services and logistics solutions, operating through a network of offices in North America, Europe, Asia, Australia, New Zealand, and South America. 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 transport our customers’ freight. We have contractual relationships with approximately 73,000 active transportation companies in 2017, including motor carriers, railroads (primarily intermodal service providers), air freight, and ocean carriers. Depending on the needs of our customer and their supply chain requirements, we select and hire the appropriate transportation for each shipment. Our model enables us to be flexible and provide solutions that optimize service for our customers.

In addition to transportation and logistics services, we also provide sourcing services. Our sourcing business consists of buying, selling, and marketing fresh produce. We purchase fresh produce through our network of produce suppliers and sell it to grocery retailers, restaurants, foodservice distributors, and produce wholesalers. In some cases, we also arrange the transportation of the produce we sell through our relationships with specialized transportation companies. Transportation revenues generated by Robinson Fresh are included in our transportation service line in the first two tables below, but are included in Robinson Fresh in the segment revenue table below.

Our reportable segments are North American Surface Transportation (“NAST”), Global Forwarding, Robinson Fresh, and All Other and Corporate. The All Other and Corporate segment includes Managed Services, Other Surface Transportation outside of North America, and other miscellaneous revenues and unallocated corporate expenses. We group offices primarily by services they provide. For financial information concerning our reportable segments and geographic regions, refer to Note 9 of our consolidated financial statements.

Our business model. We are primarily a service company. We add value and expertise in the procurement and execution of transportation and logistics, including sourcing of produce products for our customers. Our total revenues represent the total dollar value of services and goods we sell to our customers. Our net revenues are our total revenues less purchased transportation and related services, including contracted motor carrier, rail, ocean, air, and other costs, and the purchase price and services related to the products we source. Our net revenues are the primary indicator of our ability to source, add value, and sell services and products that are provided by third parties, and we consider them to be our primary performance measurement. Accordingly, the discussion of our results of operations below focuses on the changes in our net revenues.

We keep our business model as variable as possible to allow us to be flexible and adapt to changing economic and industry conditions. We sell transportation services and produce to our customers with varied pricing arrangements. Some prices are committed to for a period of time, subject to certain terms and conditions, and some prices are set on a spot market basis. We buy most of our truckload transportation capacity and produce on a spot market basis. Because of this, our net revenue per transaction tends to increase in times when there is excess supply and decrease in times when demand is strong relative to supply.

In 2017, changing market conditions continued to impact our results. We had volume increases in all of our service lines, and experienced pricing and cost increases in nearly all of our service lines, which negatively impacted our margins. Truckload margin compression was a challenge to our earnings per share during much of the year. In August 2017, we acquired Milgram & Company Ltd. (“Milgram”), a provider of freight forwarding, customs brokerage, and surface transportation primarily in Canada. Milgram operates primarily in our Global Forwarding segment.

In 2016, changing market conditions impacted our results. We had volume increases in nearly all of our service lines, but also experienced pricing declines, which impacted our net revenue margins. Truckload margin compression was a challenge to our earnings per share during the second half of the year. In September 2016, we completed the acquisition of APC Logistics (“APC”), a privately held company based in Australia, for the purpose of expanding our global presence and bringing additional capabilities and expertise to our portfolio. APC provides international freight forwarding and customs brokerage services in Australia and New Zealand. APC operates in our Global Forwarding segment.

Fuel prices declined throughout 2015, which contributed to slower growth of our total revenues and an increase in our transportation net revenue margins. In 2015, we completed the acquisition of Freightquote.com, Inc. (“Freightquote”), a privately held freight broker based in Kansas City, Missouri. Freightquote provides services throughout North America. The acquisition enhances and brings synergies to our LTL and truckload businesses, and expands our ecommerce capabilities. Freightquote operates in our NAST segment.

We keep our personnel and other operating expenses as variable as possible. Compensation is tied to productivity and performance. Each office is responsible for its hiring and headcount decisions, based on the needs of their office and to balance personnel resources with business requirements. This helps keep our personnel expense as variable as possible with the business.

Our office network. Our office network is a competitive advantage. Building local customer and contract carrier relationships has been an important part of our success, and our worldwide network of offices supports our core strategy of serving customers locally, nationally, and globally. Our network of offices helps us penetrate local markets, provides face-to-face service when needed, and enables us to recruit contract carriers. Our network also gives us knowledge of local market conditions, which is important in the transportation industry because it is market driven and very dynamic.

Our people. Because we are a service company, our continued success is dependent on our ability to continue to hire and retain talented, productive people, and to properly align our headcount and personnel expense with our business. Our headcount increased by 949 employees during 2017, which includes approximately 325 employees added as a result of the Milgram acquisition. Compensation programs are performance-based and cash incentives are directly tied to productivity and performance. Most network management compensation is dependent on the profitability of their particular office. We believe this makes our employees more service-oriented and focused on driving growth and maximizing office productivity. All of our managers and certain other employees who have significant responsibilities are eligible to receive equity awards because we believe these awards are an effective tool for creating long-term ownership and alignment between employees and our shareholders.

Our customers. In 2017, we worked with more than 120,000 customers. We work with a wide variety of companies, ranging in size from Fortune 100 companies to small family businesses, in many different industries. Our customer base is very diverse and unconcentrated. In 2017, our top 100 customers represented approximately 35 percent of our total revenues and approximately 23 percent of our net revenues. Our largest customer was approximately two percent of our total revenues.

Our contracted carriers. Our contracted carrier base includes motor carriers, railroads (primarily intermodal service providers), air freight, and ocean carriers. In 2017, we worked with approximately 73,000 transportation providers worldwide, up from approximately 71,000 in 2016. Motor carriers with fewer than 100 tractors transported approximately 82 percent of our truckload shipments in 2017. In our transportation business, no single contracted carrier represents more than approximately two percent of our contracted carrier capacity.

CONSOLIDATED RESULTS OF OPERATIONS

The following table summarizes our total revenues by service line (dollars in thousands):

For the years ended December 31,	2017				2016				Change			2015				Change
Transportation	$	13,502,906			$	11,704,745			15.4	%		$	11,989,780			(2.4	)%
Sourcing	1,366,474				1,439,668				(5.1	)%		1,486,304				(3.1	)%
Total	$	14,869,380			$	13,144,413			13.1	%		$	13,476,084			(2.5	)%

The following table illustrates our net revenue margins by service line:

For the years ended December 31,	2017			2016			2015
Transportation	16.6	%		18.4	%		17.9	%
Sourcing	9.0	%		8.5	%		8.1	%
Total	15.9	%		17.3	%		16.8	%

The following table summarizes our net revenues by service line (dollars in thousands):

For the years ended December 31,	2017				2016				Change			2015				Change
Net revenues:
Transportation
Truckload	$	1,229,999			$	1,257,191			(2.2	)%		$	1,316,533			(4.5	)%
LTL (1)	407,012				381,817				6.6	%		360,706				5.9	%
Intermodal	29,145				33,482				(13.0	)%		41,054				(18.4	)%
Ocean	290,630				244,276				19.0	%		223,643				9.2	%
Air	100,761				82,167				22.6	%		79,096				3.9	%
Customs	70,952				50,509				40.5	%		43,929				15.0	%
Other Logistics Services	117,117				105,369				11.1	%		82,548				27.6	%
Total Transportation	2,245,616				2,154,811				4.2	%		2,147,509				0.3	%
Sourcing	122,434				122,717				(0.2	)%		120,971				1.4	%
Total	$	2,368,050			$	2,277,528			4.0	%		$	2,268,480			0.4	%

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(1) Less than truckload (“LTL”).

The following table represents certain statements of operations data, shown as percentages of our net revenues:

For the years ended December 31,	2017			2016			2015
Net revenues	100.0	%		100.0	%		100.0	%
Operating expenses:
Personnel expenses	49.8	%		46.8	%		46.3	%
Other selling, general, and administrative expenses	17.5	%		16.4	%		15.8	%
Total operating expenses	67.3	%		63.2	%		62.2	%
Income from operations	32.7	%		36.8	%		37.8	%
Interest and other expense	(2.0	)%		(1.1	)%		(1.6	)%
Income before provision for income taxes	30.8	%		35.7	%		36.3	%
Provision for income taxes	9.4	%		13.1	%		13.8	%
Net income	21.3	%		22.5	%		22.5	%

The following table summarizes our results by reportable segment (dollars in thousands):

	NAST				Global Forwarding				Robinson Fresh				All Other and Corporate				Eliminations				Consolidated
Twelve months ended December 31, 2017
Revenues	$	9,728,810			$	2,140,987			$	2,415,740			$	583,843			$	—			$	14,869,380
Intersegment revenues	462,390				30,198				167,292				18,174				(678,054		)		—
Total Revenues	10,191,200				2,171,185				2,583,032				602,017				(678,054		)		14,869,380
Net Revenues	1,525,064				485,280				226,059				131,647				—				2,368,050
Operating Income	628,110				91,842				53,374				1,793				—				775,119
Twelve months ended December 31, 2016
Revenues	$	8,737,716			$	1,574,686			$	2,344,131			$	487,880			$	—			$	13,144,413
Intersegment revenues	298,438				30,311				119,403				2,211				(450,363		)		—
Total Revenues	9,036,154				1,604,997				2,463,534				490,091				(450,363		)		13,144,413
Net Revenues	1,524,355				397,537				234,794				120,842				—				2,277,528
Operating Income	674,436				80,931				75,757				6,407				—				837,531
Twelve months ended December 31, 2015
Revenues	$	8,968,349			$	1,639,944			$	2,395,440			$	472,351			$	—			$	13,476,084
Intersegment revenues	271,557				19,102				89,033				2,107				(381,799		)		—
Total Revenues	9,239,906				1,659,046				2,484,473				474,458				(381,799		)		13,476,084
Net Revenues	1,564,917				365,467				235,334				102,762				—				2,268,480
Operating Income/(Loss)	718,329				76,081				81,332				(17,432		)		—				858,310

2017 COMPARED TO 2016

Total revenues and direct costs. Total transportation revenues increased 15.4 percent to $13.5 billion in 2017 from $11.7 billion in 2016. This increase in transportation revenues was driven by volume increases in all of our transportation services and increased customer pricing in most services. Total purchased transportation and related services increased 17.9 percent in 2017 to $11.3 billion from $9.5 billion in 2016. This increase was due to increased transportation costs and higher volumes in nearly all of our transportation services. Total sourcing revenues decreased 5.1 percent to $1.37 billion in 2017 from $1.44 billion in 2016. Purchased products sourced for resale decreased 5.5 percent in 2017 to $1.2 billion from $1.3 billion in 2016. These decreases were primarily due to lower market pricing and change in service mix.

Net revenues. Total transportation net revenues increased 4.2 percent in 2017 to $2.25 billion from $2.15 billion in 2016. Our transportation net revenue margin decreased to 16.6 percent in 2017 from 18.4 percent in 2016. This decrease in net revenue margin was driven by increases in transportation costs, including fuel. Total sourcing net revenues decreased 0.2 percent to $122.4 million in 2017 from $122.7 million in 2016. This decrease was primarily due to a decrease in net revenue per case, partially offset by a case volume increase across a variety of commodities and services. Sourcing net revenue margin increased to 9.0 percent in 2017 from 8.5 percent in 2016.

Operating expenses. Operating expenses consist of personnel and selling, general, and administrative expenses. Operating expenses increased 10.6 percent to $1.6 billion in 2017 from $1.4 billion in 2016. This was due to an increase of 10.8 percent in personnel expenses and an increase of 10.2 percent in other selling, general, and administrative expenses. As a percentage of net revenues, operating expenses increased to 67.3 percent in 2017 from 63.2 percent in 2016.

Our personnel expenses are driven primarily by headcount and earnings growth. In 2017, personnel expenses increased 10.8 percent to $1.2 billion from $1.1 billion in 2016. Personnel expenses as a percentage of net revenue increased in 2017 to 49.8 percent from 46.8 percent in 2016. The increase in personnel expense was due primarily to growth in our average headcount of 7.4 percent in 2017 compared to 2016 and increases in expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability.

Other selling, general, and administrative expenses increased 10.2 percent to $413.4 million in 2017 from $375.1 million in 2016. This increase in selling, general, and administrative expenses was primarily due to increases in acquisition amortization, warehousing and occupancy expenses, and the provision for bad debt, partially offset by a decrease in travel expenses and claims.

Income from operations. Income from operations decreased 7.5 percent to $775.1 million in 2017 from $837.5 million in 2016. Income from operations as a percentage of net revenues decreased to 32.7 percent in 2017 from 36.8 percent in 2016. This decrease was due to our operating expenses growing more than our net revenues and a decline in transportation net revenue margin.

Interest and other expense. Interest and other expense was $46.7 million in 2017 compared to $25.6 million in 2016. The increase was primarily due to a higher average debt balance and higher interest rates in 2017 compared to 2016.

Provision for income taxes. Our effective income tax rate was 30.7 percent for 2017 and 36.8 percent for 2016. During the fourth quarter of 2017, the provision for income taxes decreased by $19.7 million due to the benefit of deductions under Section 199 of the Internal Revenue Code and $12.1 million due to the impact of the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017. The $12.1 million benefit resulting from the Tax Act was primarily the result of the revaluation of deferred tax assets and liabilities due to the decrease in the corporate Federal income tax rate from 35 percent to 21 percent and was partially offset by the impact of certain transition taxes and other impacts of the Tax Act.

During the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718). The adoption of ASU 2016-09 prospectively impacts the recording of income taxes related to share-based payment awards in our consolidated financial position and results of operations, as well as the operating and financing cash flows on the consolidated statements of cash flows. This adoption resulted in a net tax benefit of $13.7 million during the year.

During the first quarter of 2016, we asserted that we will indefinitely reinvest earnings of foreign subsidiaries to support expansion of our international businesses. During 2017, our indefinite reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries, provided an approximate $3.7 million benefit to our provision for income taxes. If we repatriated all foreign earnings, the estimated effect on income taxes payable would be an increase of approximately $12.1 million as of December 31, 2017.

Net income. Net income decreased 1.7 percent to $504.9 million in 2017 from $513.4 million in 2016. Basic net income per share decreased 0.3 percent to $3.59 in 2017 from $3.60 in 2016. Diluted net income per share decreased 0.6 percent to $3.57 in 2017 from $3.59 in 2016.

SEGMENT RESULTS OF OPERATIONS-2017 COMPARED TO 2016

North American Surface Transportation. NAST revenues increased 11.3 percent to $9.7 billion in 2017 compared to $8.7 billion in 2016. This was primarily due to increased volumes and increased pricing to our customers. NAST cost of purchased transportation and related services increased 13.7 percent to $8.2 billion in 2017 from $7.2 billion in 2016. This increase was primarily due to increased volumes and higher transportation costs. Total NAST net revenues were flat at $1.5 billion in 2017. This was driven by a decline in truckload and intermodal net revenues, partially offset by an increase in LTL net revenues. NAST net revenue margin decreased primarily due to transportation costs growing faster than customer pricing in 2017 compared to 2016.

NAST truckload net revenues decreased 1.8 percent in 2017 to $1.09 billion from $1.11 billion in 2016. NAST truckload volumes increased approximately 4.5 percent in 2017 compared to 2016. NAST truckload net revenue margin decreased in 2017 compared to 2016, due primarily to increased transportation costs.

NAST truckload net revenues accounted for approximately 93 percent of our total North America truckload net revenues in 2017 and approximately 92 percent in 2016. The majority of the remaining North American truckload net revenues is included in Robinson Fresh. Excluding the estimated impacts of the change in fuel prices, our average North America truckload rate per mile charged to our customers increased approximately 4.5 percent in 2017 compared to 2016. Excluding the estimated impacts of the change in fuel prices, our average North America truckload transportation cost per mile increased approximately 6.5 percent in 2017 compared to 2016.

NAST LTL net revenues increased 6.2 percent in 2017 to $388.8 million from $366.1 million in 2016. NAST LTL volumes increased approximately eight percent in 2017 compared to 2016 and net revenue margin decreased. NAST LTL net revenue margin decreased due to increased transportation costs.

NAST intermodal net revenues decreased 14.6 percent to $26.7 million in 2017 from $31.3 million in 2016. This was primarily due to declines in net revenue margin, partially offset by increased volumes with our lower-margin contractual customers, partially offset by a decrease in transactional business.

NAST operating expenses increased 5.5 percent in 2017 to $897.0 million from $849.9 million in 2016. This was due to an increase in personnel expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability, and an increase in selling, general, and administrative expenses. The operating expenses of NAST and all other segments include allocated corporate expenses.

NAST operating income decreased 6.9 percent to $628.1 million in 2017 from $674.4 million in 2016. This was primarily due to increases in operating expenses, while net revenues remained flat.

Global Forwarding. Global Forwarding revenues increased 36.0 percent to $2.1 billion in 2017 from $1.6 billion in 2016. This increase was primarily related to increased volumes in all services and increased customer pricing. Global Forwarding costs of transportation and related services increased 40.7 percent to $1.7 billion in 2017 from $1.2 billion in 2016. Global Forwarding net revenues increased 22.1 percent to $485.3 million in 2017 from $397.5 million in 2016. Global Forwarding net revenue margin decreased due to transportation costs increasing at a faster rate than customer pricing. The acquisitions of APC and Milgram accounted for approximately eight percentage points of the net revenue growth in Global Forwarding.

Ocean transportation net revenues increased 19.1 percent to $290.8 million in 2017 from $244.2 million in 2016. This was primarily due to increases in volumes, including those from acquisitions. Air net revenues increased 24.1 percent to $94.5 million in 2017 from $76.1 million in 2016. This was primarily due to increases in volumes partially offset by cost increases. Customs net revenues increased 40.5 percent to $70.9 million in 2017 from $50.5 million in 2016. The increase was primarily due to increased transaction volumes, including those from acquisitions.

Global Forwarding operating expenses increased 24.3 percent in 2017 to $393.4 million from $316.6 million in 2016. This increase was due to increases in both personnel and selling, general, and administrative expenses. The personnel expense increase was driven by an average headcount increase of 17.3 percent, primarily due to the additions of APC and Milgram. The selling, general, and administrative expense increase was also primarily driven by the additions of APC and Milgram.

Global Forwarding operating income increased 13.5 percent in 2017 to $91.8 million from $80.9 million in 2016. This was primarily due to an increase in net revenues driven by increased volumes and customer pricing, partially offset by increased operating expenses.

Robinson Fresh. Robinson Fresh revenues increased 3.1 percent to $2.4 billion in 2017 from $2.3 billion in 2016. Robinson Fresh costs of transportation and related services and purchased products sourced for resale increased 3.8 percent to $2.2 billion in 2017 from $2.1 billion in 2016. Robinson Fresh net revenues decreased 3.7 percent to $226.1 million in 2017 from $234.8 million in 2016. This decrease was primarily due to declines in transportation net revenues.

Robinson Fresh sourcing net revenues decreased 0.2 percent to $122.4 million in 2017 from $122.7 million in 2016. This decrease was primarily due to a decrease in net revenue per case, partially offset by a one percent case volume increase. Robinson Fresh net revenues from transportation services decreased 7.5 percent to $103.6 million in 2017 from $112.1 million in 2016. This decrease was driven by a decline in truckload net revenues, partially offset by an increase in other transportation net revenues. Robinson Fresh transportation net revenue margin decreased in 2017 compared to 2016, due primarily to increased costs of transportation.

Robinson Fresh operating expenses increased 8.6 percent to $172.7 million in 2017 from $159.0 million in 2016. This was due to increases in both selling, general and administrative and personnel expenses. The increase in selling, general, and administrative expenses was due to higher warehousing and claims expenses in 2017 compared to 2016. In 2017, personnel expenses increased primarily due to an increase in salaries and an increase in average headcount of 1.6 percent in 2017 compared to 2016.

Robinson Fresh operating income decreased 29.5 percent to $53.4 million in 2017 from $75.8 million in 2016. This was primarily due to an increase in operating expenses and a decrease in net revenues.

All Other and Corporate. All Other and Corporate includes our Managed Services segment, as well as Other Surface Transportation outside of North America and other miscellaneous revenues and unallocated corporate expenses. Managed Services provides Transportation Management Services, or Managed TMS®. Other Surface Transportation revenues are primarily earned by Europe Surface Transportation. Europe Surface Transportation provides services similar to NAST across Europe.

Managed Services net revenues increased 11.5 percent to $72.2 million in 2017 from $64.7 million in 2016. This increase was primarily due to volume growth with new and existing customers. Other Surface Transportation net revenues increased 5.9 percent to $59.5 million in 2017 from $56.1 million in 2016. This increase is primarily the result of volume growth, partially offset by margin compression in the surface transportation business in Europe.

2016 COMPARED TO 2015

Total revenues and direct costs. Total transportation revenues decreased 2.4 percent to $11.7 billion in 2016 from $12.0 billion in 2015. This decrease in transportation revenues was driven by lower customer pricing in truckload, partially offset by volume increases in nearly all of our transportation services. Total purchased transportation and related services decreased 3.0 percent in 2016 to $9.5 billion from $9.8 billion in 2015. This decrease was due to decreased transportation costs, partially offset by higher volumes in nearly all of our transportation services. Total sourcing revenues decreased 3.1 percent to $1.4 billion in 2016 from $1.5 billion in 2015. Purchased products sourced for resale decreased 3.5 percent in 2016 to $1.3 billion from $1.4 billion in 2015. These decreases were primarily due to lower market pricing and change in service mix.

Net revenues. Total transportation net revenues increased 0.3 percent in 2016 to $2.2 billion from $2.1 billion in 2015. Our transportation net revenue margin increased to 18.4 percent in 2016 from 17.9 percent in 2015. This increase in net revenue margin was driven by decreases in transportation costs and customer pricing, including fuel. Total sourcing net revenues increased 1.4 percent to $122.7 million in 2016 from $121.0 million in 2015. This increase was primarily due to a case volume increase across a variety of commodities and services, partially offset by a decrease in net revenue per case. Sourcing net revenue margin increased to 8.5 percent in 2016 from 8.1 percent in 2015.

Operating expenses. Operating expenses consist of personnel and selling, general, and administrative expenses. Operating expenses increased 2.1 percent to $1.44 billion in 2016 from $1.41 billion in 2015. This was due to an increase of 1.3 percent in personnel expenses and an increase of 4.5 percent in other selling, general, and administrative expenses. As a percentage of net revenues, operating expenses increased to 63.2 percent in 2016 from 62.2 percent in 2015.

Our personnel expenses are driven primarily by headcount and earnings growth. In 2016, personnel expenses increased 1.3 percent to $1.06 billion from $1.05 billion in 2015. Personnel expenses as a percentage of net revenue increased in 2016 to 46.8 percent from 46.3 percent in 2015. The increase in personnel expense was due primarily to an increase in average headcount growth of 6.0 percent in 2016, due in part to the acquisition of APC. The headcount growth was partially offset by decreases in personnel expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability.

Other selling, general, and administrative expenses increased 4.5 percent to $375.1 million in 2016 from $358.8 million in 2015. This increase in selling, general, and administrative expenses was primarily due to increases in warehousing and travel expenses, partially offset by decreases in the provision for bad debt and occupancy expenses.

Income from operations. Income from operations decreased 2.4 percent to $837.5 million in 2016 from $858.3 million in 2015. Income from operations as a percentage of net revenues decreased to 36.8 percent in 2016 from 37.8 percent in 2015. This decrease was due to our operating expenses growing more than our net revenues.

Interest and other expense. Interest and other expense was $25.6 million in 2016 compared to $35.5 million in 2015. During the fourth quarter of 2015, we wrote off an indemnification asset of $7.2 million related to the acquisition of Phoenix as the indemnification obligations of the sellers expired. The impact of this write off was partially offset within the provision for income taxes by related tax liabilities that expired under applicable statute of limitations.

Provision for income taxes. Our effective income tax rate was 36.8 percent for 2016 and 38.1 percent for 2015. During the first quarter of 2016, we asserted that we will indefinitely reinvest earnings of foreign subsidiaries to support expansion of our international businesses. During 2016, the assertion decreased deferred income taxes related to undistributed foreign earnings and reduced the effective tax rate compared to 2015. In 2016, our indefinite reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided an approximate $5.1 million benefit to our provision for income taxes. If we repatriated all foreign earnings, the estimated effect on income taxes payable would be an increase of approximately $16.6 million as of December 31, 2016. Additionally, 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 increased 0.7 percent to $513.4 million in 2016 from $509.7 million in 2015. Basic net income per share increased 2.3 percent to $3.60 in 2016 from $3.52 in 2015. Diluted net income per share increased 2.3 percent to $3.59 in 2016 from $3.51 in 2015.

SEGMENT RESULTS OF OPERATIONS-2016 COMPARED TO 2015

North American Surface Transportation. NAST total revenues decreased 2.6 percent to $8.7 billion in 2016 compared to $9.0 billion in 2015. This was primarily due to decreased pricing to our customers, partially offset by increased volumes. NAST cost of purchased transportation and related services decreased 2.6 percent to $7.2 billion in 2016 from $7.4 billion in 2015. This decrease was primarily due to lower transportation costs. Total NAST net revenues decreased 2.6 percent to $1.5 billion in 2016 from $1.6 billion in 2015. The decrease was driven by a decline in truckload and intermodal net revenues, partially offset by an increase in LTL net revenues.

NAST truckload net revenues decreased 4.7 percent in 2016 to $1.1 billion from $1.2 billion in 2015. NAST truckload volumes increased approximately 5.5 percent in 2016 compared to 2015. NAST truckload net revenue margin decreased in 2016 compared to 2015, due primarily to lower customer pricing.

NAST truckload net revenues accounted for approximately 92 percent of our total North America truckload net revenues in 2016 and 2015. The majority of the remaining North American truckload net revenues is included in Robinson Fresh. Excluding the estimated impacts of the change in fuel prices, our average North America truckload rate per mile charged to our customers decreased approximately 5.0 percent in 2016 compared to 2015. Excluding the estimated impacts of the change in fuel prices, our average North America truckload transportation cost per mile decreased approximately 4.5 percent in 2016 compared to 2015.

NAST LTL net revenues increased 5.1 percent in 2016 to $366.1 million from $348.3 million in 2015. NAST LTL volumes increased approximately 7.5 percent in 2016 compared to 2015, and net revenue margin increased slightly.

NAST intermodal net revenues decreased 20.1 percent to $31.3 million in 2016 from $39.2 million in 2015. This was primarily due to declines in net revenue margin and volumes. During 2016, intermodal opportunities were negatively impacted by the alternative lower-cost truck market.

NAST operating expenses increased 0.4 percent in 2016 to $849.9 million from $846.6 million in 2015. This was primarily due to increases in selling, general, and administrative expenses, partially offset by a decrease in personnel expenses related to incentive plans that are designed to keep expenses variable with changes in net revenues and profitability. The operating expenses of NAST and all other segments include allocated corporate expenses.

NAST operating income decreased 6.1 percent to $674.4 million in 2016 from $718.3 million in 2015. This was primarily due to a decline in total revenues and net revenues caused by lower customer pricing.

Global Forwarding. Global Forwarding total revenues decreased 4.0 percent to $1.57 billion in 2016 from $1.64 billion in 2015. This decrease was primarily related to lower customer pricing across ocean and air services, partially offset by increased volumes in all services. Global Forwarding costs of transportation and related services decreased 7.6 percent to $1.2 billion in 2016 from $1.3 billion in 2015. Global Forwarding net revenues increased 8.8 percent to $397.5 million in 2016 from $365.5 million in 2015. Global Forwarding net revenue margin increased due to transportation costs declining at a faster rate than customer pricing.

Ocean transportation net revenues increased 9.4 percent to $244.2 million in 2016 from $223.3 million in 2015. This was primarily due to increases in volumes. Air net revenues increased 3.9 percent to $76.1 million in 2016 from $73.3 million in 2015. This was primarily due to increases in volumes offset by pricing declines. Customs net revenues increased 14.9 percent to $50.5 million in 2016 from $44.0 million in 2015. The increase was primarily due to increased transaction volumes.

Global Forwarding operating expenses increased 9.4 percent in 2016 to $316.6 million from $289.4 million in 2015. This increase was primarily due to an increase in claims expense, and the acquisition of APC on September 30, 2016.

Global Forwarding operating income increased 6.4 percent in 2016 to $80.9 million from $76.1 million in 2015. This was primarily due to an increase in net revenues driven by higher volumes, partially offset by increased operating expenses.

Robinson Fresh. Robinson Fresh total revenues decreased 2.1 percent to $2.3 billion in 2016 from $2.4 billion in 2015. Robinson Fresh costs of transportation and related services and purchased products sourced for resale decreased 2.4 percent in to $2.1 billion in 2016 from $2.2 billion in 2015. Robinson Fresh net revenues decreased 0.2 percent to $234.8 million in 2016 from $235.3 million in 2015. This decrease was due to declines in transportation net revenues, partially offset by an increase in sourcing net revenue.

Robinson Fresh net revenues from sourcing services increased 1.4 percent to $122.7 million in 2016 from $121.0 million in 2015. This increase was primarily due to a case volume increase across a variety of commodities and services, partially offset by a decrease in net revenue per case. Robinson Fresh net revenues from transportation services decreased 2.0 percent to

$112.1 million in 2016 from $114.4 million in 2015. Robinson Fresh transportation net revenue margin decreased in 2016 compared to 2015, due primarily to lower customer pricing.

Robinson Fresh operating expenses increased 3.3 percent to $159.0 million in 2016 from $154.0 million in 2015. This increase was primarily due to an increase in warehousing expenses. In 2016, growth in Robinson Fresh headcount was offset by a decrease in variable compensation.

Robinson Fresh operating income decreased 6.9 percent to $75.8 million in 2016 from $81.3 million in 2015. This was primarily due to a decrease in transportation services net revenues, and an increase in operating expenses.

All Other and Corporate. All Other and Corporate includes our Managed Services segment, as well as Other Surface Transportation outside of North America and other miscellaneous revenues and unallocated corporate expenses. Managed Services provides Transportation Management Services, or Managed TMS. Other Surface Transportation revenues are primarily earned by Europe Surface Transportation. Europe Surface Transportation provides services similar to NAST across Europe.

Managed Services net revenues increased 32.7 percent to $64.7 million in 2016 from $48.7 million in 2015. This increase was primarily due to volume growth with new and existing customers. Other Surface Transportation net revenues increased 3.9 percent to $56.1 million in 2016 from $54.0 million in 2015, primarily the result of volume growth in Europe Surface Transportation.

LIQUIDITY AND CAPITAL RESOURCES

We have historically generated substantial cash from operations, which has enabled us to fund our growth while paying cash dividends and repurchasing stock. In December 2014, we amended our revolving credit facility to increase the amount available from $500 million to $900 million, to extend the expiration date from October 2017 to December 2019, and to revise a covenant ratio. In 2013, we entered into a Note Purchase Agreement to fund the accelerated share repurchase agreements to repurchase $500 million worth of our common stock. The Note Purchase Agreement was amended in February 2015 to conform its financial covenants to be consistent with the amended revolving credit facility. In April 2017, we entered into a $250 million U.S. Trade Accounts Receivable Securitization facility to reduce the amount outstanding on our revolving credit facility. We also expect to use the revolving credit facility, 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 $333.9 million and $247.7 million as of December 31, 2017 and 2016. Cash and cash equivalents held outside the United States totaled $275.3 million and $172.2 million as of December 31, 2017 and 2016. Working capital at December 31, 2017, was $523.5 million. Working capital at December 31, 2016, was $162.4 million.

We prioritize our investments to grow the business, as we require some working capital and a relatively small amount of capital expenditures to grow. We are continually looking for acquisitions, but those acquisitions must fit our culture and enhance our growth opportunities.

Cash flow from operating activities. We generated $384.0 million, $529.4 million, and $718.3 million of cash flow from operations in 2017, 2016, and 2015. The decrease of $145.4 million and in cash flow from operations in 2017 from 2016 is primarily the result of increased working capital driven by the impact of increased volumes and a deterioration of our accounts receivable aging. The decrease of $188.9 million in cash flow from operations in 2016 from 2015 is primarily the result of increases in accounts receivable, partially offset by an increase in accounts payable. The increases in accounts receivable and accounts payable are primarily the result of increased volumes. Additionally, accruals for variable compensation were lower in 2016 compared to 2015.

Cash used for investing activities. We used $107.5 million, $313.0 million, and $54.4 million of cash for investing activities in 2017, 2016, and 2015. Our investing activities consist primarily of capital expenditures and cash paid for acquisitions. In 2017, we paid $47.3 million for the acquisition of Milgram. In 2016, we paid $220.2 million for the acquisition of APC.

We used $57.9 million, $91.4 million, and $44.6 million of cash for capital expenditures in 2017, 2016, and 2015. We spent $29.0 million, $25.0 million, and $26.0 million in 2017, 2016, and 2015 primarily for annual investments in information technology equipment to support our operating systems, including the purchase and development of software. These information technology investments are intended to improve efficiencies and help grow the business. Additionally, in 2016, we completed construction of a second data recovery center. The cost of this data recovery center was $20.0 million, $19.3 million of which was spent in 2016.

We anticipate capital expenditures in 2018 to be approximately $60 to $70 million.

Cash used for financing activities. We used $202.1 million, $127.3 million, and $607.7 million of cash flow for financing activities in 2017, 2016, and 2015.

We had net short-term repayments of $25.0 million in 2017 and net short-term borrowings of $290.0 million in 2016. The outstanding balance on the revolving credit facility was $715.0 million as of December 31, 2017.

During 2017, we had long-term borrowings of $250.0 million on the Receivables Securitization Facility. The outstanding balance on the Receivables Securitization Facility was $250.0 million as of December 31, 2017. We were in compliance with all of the covenants under the Credit Agreement, Note Purchase Agreement, and Receivables Securitization Facility as of December 31, 2017.

We used $258.2 million, $245.4 million, and $235.6 million to pay cash dividends in 2017, 2016, and 2015. The increases were primarily the result of higher dividend rates, partially offset by fewer outstanding shares.

We used $21.6 million, $36.7 million, and $11.4 million for stock tendered for payment of withholding taxes in 2017, 2016, and 2015.

We also used $185.5 million, $172.9 million, and $229.9 million on share repurchases in 2017, 2016, and 2015, as part of our Board approved repurchase program. In August 2013, the Board of Directors increased the number of shares authorized to be repurchased by 15,000,000 shares. As of December 31, 2017, there were 1,992,157 shares remaining for future repurchases. The number of shares we repurchase, if any, during future periods will vary based on our cash position, potential uses of our cash, and market conditions.

Assuming no change in our current business plan, management believes that our available cash, together with expected future cash generated from operations, the amount available under our credit facility, and credit available in the market, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends for at least the next 12 months. We also believe we could obtain funds under lines of credit or other forms of indebtedness on short notice, if needed.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Note 1 of the Notes to consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of our critical accounting policies and estimates.

Revenue recognition. Total revenues consist of the total dollar value of goods and services purchased from us by customers. Net revenues are total revenues less the direct costs of transportation, products, and handling. We act principally as the service provider for these transactions and recognize revenue as these services are rendered or goods are delivered. At that time, our obligations to the transactions are completed and collection of receivables is reasonably assured. Most transactions in our transportation and sourcing businesses are recorded at the gross amount we charge our customers for the service we provide and goods we sell. In these transactions, we are the primary obligor, we have credit risk, we have discretion to select the supplier, and we have latitude in pricing decisions.

Additionally, in our sourcing business, we take loss of inventory risk during shipment and have general inventory risk. Certain transactions in customs brokerage, managed services, freight forwarding, and sourcing are recorded at the net amount we charge our customers for the service we provide because many of the factors stated above are not present.

Valuations for accounts receivable. Our allowance for doubtful accounts is calculated based upon the aging of our receivables, our historical experience of uncollectible accounts, and any specific customer collection issues that we have identified. The allowance of $42.4 million as of December 31, 2017, increased compared to the allowance of $39.5 million as of December 31, 2016. This increase was primarily due to growth in the balance and deterioration of the aging of our accounts receivable portfolio. We believe that the recorded allowance is sufficient and appropriate based on our customer aging trends, the exposures we have identified, and our historical loss experience.

Goodwill. Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is tested for impairment annually on November 30, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first perform a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting units is less than their respective carrying value (“Step Zero Analysis”). If the Step Zero Analysis indicates it is more likely than not that the fair value of our reporting units is less than their respective carrying value, an additional impairment assessment is performed (“Step 1 Analysis”). Based on our Step Zero Analysis, we determined that the more likely than not criteria had not been met, and therefore a Step 1 Analysis was not required.

When we perform a Step 1 Analysis, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. We have early adopted Accounting Standards Update 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the need for further testing after the Step 1 Analysis.

In the Step 1 Analysis, the fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital, and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations when a Step 1 analysis is performed.

Stock-based compensation. We issue stock awards, including stock options, performance shares, and restricted stock units, to key employees and outside directors. In general, the awards vest over five years, either based on the company’s earnings growth or the passage of time. The fair value of each share-based payment award is established on the date of grant. For grants of restricted shares and restricted units, the fair value is established based on the market price on the date of the grant, discounted for post-vesting holding restrictions. The discounts on outstanding grants vary from 15 percent to 21 percent and are calculated using the Black-Scholes option pricing model. Changes in the measured stock price volatility and interest rates are the primary reason for changes in the discount. For grants of options, we use the Black-Scholes option pricing model to estimate the fair value of the awards. The determination of the fair value is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate, and expected dividends.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL CONTINGENCIES

The following table aggregates all contractual commitments and commercial obligations, due by period, that affect our financial condition and liquidity position as of December 31, 2017 (dollars in thousands):

	2018				2019				2020				2021				2022				Thereafter				Total
Borrowings under credit agreements	$	715,000			$	250,000			$	—			$	—			$	—			$	—			$	965,000
Long-term notes payable(1)	21,388				21,388				21,388				21,388				21,388				633,838				740,778
Operating leases(2)	51,273				46,172				39,825				29,851				22,807				92,797				282,725
Purchase obligations(3)	81,133				21,058				12,433				9,869				98				392				124,983
Total	$	868,794			$	338,618			$	73,646			$	61,108			$	44,293			$	727,027			$	2,113,486

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(1)	Amounts payable relate to the semi-annual interest due on the long-term notes and the principal amount at maturity.

(2)	We have certain facilities and equipment under operating leases.

(3)	Purchase obligations include agreements for services that are enforceable and legally binding and that specify all significant terms. As of December 31, 2017, such obligations include ocean and air freight capacity, telecommunications services, and maintenance contracts.

We have no capital lease obligations. Long-term liabilities consist of noncurrent income taxes payable, long-term notes payable, and the obligation under our non-qualified deferred compensation plan. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2017, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $38.6 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 5 to the consolidated financial statements for a discussion on income taxes. The obligation under our non-qualified deferred compensation plan has also been excluded from the above table as the timing of cash payment is uncertain. As of December 31, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.