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

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

OVERVIEW

C.H. Robinson Worldwide, Inc. (“C.H. Robinson,” “the company,” “we,” “us,” or “our”) is one of the world's largest logistics platforms. Our mission is to improve the world's supply chains through our people, processes, and technology by delivering exceptional value to our customers and suppliers. 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 in North America, Europe, Asia, Oceania, and South America. We offer a global suite of services using tailored, market-leading technology built by and for supply chain experts. Our global network of supply chain experts work with our customers to drive better supply chain outcomes by leveraging our experience, data, technology, and scale.

Our adjusted gross profit and adjusted gross profit margin are non-GAAP financial measures. Adjusted gross profit is calculated as gross profit excluding amortization of internally developed software utilized to directly serve our customers and contracted carriers. Adjusted gross profit margin is calculated as adjusted gross profit divided by total revenues. We believe adjusted gross profit and adjusted gross profit margin are useful measures of our ability to source, add value, and sell services and products that are provided by third parties, and we consider adjusted gross profit to be a primary performance measurement. Accordingly, the discussion of our results of operations often focuses on the changes in our adjusted gross profit and adjusted gross profit margin. The reconciliation of gross profit to adjusted gross profit and gross profit margin to adjusted gross profit margin is presented below (dollars in thousands):

Twelve Months Ended December 31,
202020192018
Revenues:
Transportation$15,147,562$14,322,295$15,515,921
Sourcing1,059,544987,2131,115,251
Total revenues16,207,10615,309,50816,631,172
Costs and expenses:
Purchased transportation and related services12,834,60811,839,43312,922,177
Purchased products sourced for resale960,241883,7651,003,760
Direct internally developed software amortization16,63411,4929,664
Total direct costs13,811,48312,734,69013,935,601
Gross profit / Gross profit margin2,395,62314.8%2,574,81816.8%2,695,57116.2%
Plus: Direct internally developed software amortization16,63411,4929,664
Adjusted gross profit / Adjusted gross profit margin$2,412,25714.9%$2,586,31016.9%$2,705,23516.3%

Our adjusted operating margin is a non-GAAP financial measure calculated as operating income divided by adjusted gross profit. We believe adjusted operating margin is a useful measure of our profitability in comparison to our adjusted gross profit, which we consider a primary performance metric as discussed above. The reconciliation of operating margin to adjusted operating margin is presented below (dollars in thousands):

Twelve Months Ended December 31,
202020192018
Total revenues$16,207,106$15,309,508$16,631,172
Operating income673,268789,976912,083
Operating margin4.2%5.2%5.5%
Adjusted gross profit$2,412,257$2,586,310$2,705,235
Operating income673,268789,976912,083
Adjusted operating margin27.9%30.5%33.7%

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MARKET TRENDS

The North American surface transportation market experienced significant volatility in freight volumes and costs over the duration of 2020 as a result of the COVID-19 pandemic. The impact on the market varied significantly depending on the severity of the restrictions in place to control the outbreak, industry, and customer size. Certain industries, such as retail, saw periods of elevated demand while other industries, especially smaller customers in those industries, experienced extended periods of demand and production well below historical levels. Industry freight volumes, as measured by the Cass Freight Index, declined approximately eight percent in 2020 compared to 2019, which reflects the volatility resulting from the COVID-19 pandemic. Industry freight volumes compared to 2019 bottomed out in the second quarter of 2020, declining approximately 21 percent before showing growth of approximately four percent in the fourth quarter of 2020 compared to the prior year.

The impact of reduced consumer demand and production, in addition to driver shortages, resulted in reduced carrier capacity, most notably in truckload, as many carriers either reduced lanes or exited the market entirely. This reduced carrier capacity caused routing guides to rapidly degrade and more loads moved to the spot market, driving sharp increases in transportation costs, most significantly in the second half 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 is calculated as a simple average of all accepted shipments over all tender instances for any shipment facilitated by our Managed Services business. The average routing guide depth was 1.4 in 2020 and increased steadily during the second half of 2020, to 1.8 in the fourth quarter of 2020. This compared to an average depth of tender of 1.2 during 2019, which is among the lowest levels we have experienced this decade.

The global forwarding market also experienced significant volatility resulting from the COVID-19 pandemic. The air freight market experienced a significant decline in capacity due to a reduction in commercial flights from COVID-19 restrictions, which resulted in sharp pricing increases. The impact of the COVID-19 pandemic on the ocean freight market varied significantly over the course of 2020 depending on the severity of the outbreak in regions in which we operate. Many industries experienced temporary volume reductions and factory closures due to efforts to contain the spread of the virus, which initially resulted in excess capacity and decreased pricing early in 2020. In the second half of 2020, most industries had resumed production and companies began to replenish low inventory levels amidst continued market uncertainty from the ongoing COVID-19 pandemic. As demand accelerated, it outpaced carrier capacity returning to the market, which resulted in significant pricing increases for the cost of ocean freight.

BUSINESS TRENDS

Our 2020 surface transportation results were 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 eight percent in 2020, our combined North American Surface Transportation (“NAST”) truckload and LTL volumes increased approximately 5.5 percent. The COVID-19 pandemic had a significant impact on our small business customers as our customer count decreased nearly 12 percent, driven almost entirely by small and emerging market customers. Similarly, the number of active contracted transportation companies we utilized declined approximately six percent, solely with those carriers having a fleet under 100 trucks. We continued to work with our customers to meet our contractual commitments 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 adjusted gross profit margin compression.

Our global forwarding results were largely consistent with the overall market trends summarized above. Throughout 2020, we augmented our air freight capacity with charter flights due to the significant capacity shortages in the market, which resulted in larger than normal shipment sizes. The increase in air freight pricing more than offset an 18.0 percent decline in air freight volumes. Ocean volumes increased a modest 0.5 percent in 2020 as volume reductions in the first half of 2020 due to the COVID-19 pandemic were more than offset by increases in the second half of 2020 as industries resumed production and demand increased. Our ocean business experienced significant increases in the cost of ocean freight beginning in the second quarter as many ocean carriers idled capacity due to the impacts of the COVID-19 pandemic and this capacity was slow to return to the market in comparison to the demand and production increases experienced in the second half of 2020. These factors resulted in a rapidly increasing price and cost environment.

On March 2, 2020, we acquired Prime Distribution Services (“Prime Distribution” or "Prime"), a leading provider of retail consolidation services in North America, for $222.7 million in cash. The acquisition was effective as of February 29, 2020, and therefore the results of operations of Prime Distribution have been included as part of the NAST segment in our consolidated financial statements since March 1, 2020. On February 28, 2019, we acquired The Space Cargo Group (“Space Cargo”) for the purpose of expanding our presence and capabilities in Spain and Colombia. Our consolidated results include the results of

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Space Cargo since March 1, 2019. On May 22, 2019, we acquired Dema Service S.p.A (“Dema Service”) to strengthen our existing footprint in Italy. Our consolidated results include the results of Dema Service since May 23, 2019.

SIGNIFICANT DEVELOPMENTS

Our 2020 financial results and operations were impacted by the COVID-19 pandemic described above and discussed throughout Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.” In addition, see Part I—“Item 1A, Risk Factors,” included within this Annual Report on Form 10-K for discussion of the impacts and potential impacts of the COVID-19 pandemic. The extent to which the COVID-19 pandemic impacts our financial results and operations in 2021 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.

During 2020, 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 near the end of 2020 approximately 84 percent of our employees were working remotely, executing their duties and responsibilities. In addition, we took steps in 2020 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 for U.S. and Canadian employees, accelerating the use of paid time off, and furloughing approximately seven percent of our U.S. and Canadian employees in the second quarter of 2020. As we continued to harness the benefits of our technology investment and network transformation, we eliminated certain positions during 2020, and therefore, a portion of employees did not return from furlough. We recognized $4.4 million in severance in 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 the COVID-19 pandemic may have on our financial results and operations in 2021 and going forward. However, the impact could be material in all business segments and could be material during any future period affected either directly or indirectly by this pandemic. Many businesses, in particular small 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 adjusted gross profit margins as we honor our contractual freight rates.

SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS

The following summarizes select 2020 year-over-year operating comparisons to 2019:

  • Total revenues increased 5.9 percent to $16.2 billion, driven primarily by higher pricing in ocean and air freight services and contributions from the Prime acquisition.

  • Gross profits decreased 7.0 percent to $2.4 billion. Adjusted gross profits decreased 6.7 percent to $2.4 billion, primarily driven by lower adjusted gross profit margins in truckload services, partially offset by contributions from the Prime acquisition and higher adjusted gross profits in air freight and ocean services.

  • Personnel expenses decreased 4.3 percent to $1.2 billion, driven primarily by cost savings initiatives, including a 2.8 percent decrease in average headcount and a decline in benefits expenses and incentive compensation.

  • Selling, general, and administrative (“SG&A”) expenses decreased 0.3 percent to $496.1 million, primarily due to significantly lower travel expenses, partially offset by the ongoing expenses from the Prime acquisition.

  • Income from operations totaled $673.3 million, down 14.8 percent from last year due to a decline in adjusted gross profits. Adjusted operating margin of 27.9 percent decreased 260 basis points.

  • Interest and other expenses totaled $44.9 million, which primarily consisted of $49.1 million of interest expense and was partially offset by a $3.3 million favorable impact from foreign currency revaluation and realized foreign currency gains and losses.

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  • The effective tax rate for 2020 was 19.4 percent compared to 22.3 percent in 2019. The lower effective tax rate was due primarily to the tax benefit related to stock-based compensation, including delivery of a one-time deferred stock award that was granted to the company's prior Chief Executive Officer in 2000, and excess foreign tax credits.

  • Net income totaled $506.4 million, down 12.2 percent from a year ago. Diluted earnings per share (EPS) decreased 11.2 percent to $3.72.

  • Cash flow from operations decreased 40.2 percent to $499.2 million.

CONSOLIDATED RESULTS OF OPERATIONS

The following table summarizes our results of operations (dollars in thousands, except per share data):

Twelve Months Ended December 31,
20202019% change2018% change
Revenues:
Transportation$15,147,562$14,322,2955.8%$15,515,921(7.7)%
Sourcing1,059,544987,2137.3%1,115,251(11.5)%
Total revenues16,207,10615,309,5085.9%16,631,172(7.9)%
Costs and expenses:
Purchased transportation and related services$12,834,60811,839,4338.4%12,922,177(8.4)%
Purchased products sourced for resale960,241883,7658.7%1,003,760(12.0)%
Personnel expenses1,242,8671,298,528(4.3)%1,343,542(3.4)%
Other selling, general, and administrative expenses496,122497,806(0.3)%449,61010.7%
Total costs and expenses15,533,83814,519,5327.0%15,719,089(7.6)%
Income from operations673,268789,976(14.8)%912,083(13.4)%
Interest and other expense(44,937)(47,719)(5.8)%(31,810)50.0%
Income before provision for income taxes628,331742,257(15.3)%880,273(15.7)%
Provision for income taxes121,910165,289(26.2)%215,768(23.4)%
Net income$506,421$576,968(12.2)%$664,505(13.2)%
Diluted net income per share$3.72$4.19(11.2)%$4.73(11.4)%
Average headcount15,11915,551(2.8)%15,2042.3%
Adjusted gross profit margin percentage**(1)**
Transportation15.3%17.3%(2.0) pts16.7%0.6 pts
Sourcing9.4%10.5%(1.1) pts10.0%0.5 pts
Total adjusted gross profit margin14.9%16.9%(2.0) pts16.3%0.6 pts

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

The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of the twelve months ended December 31, 2020, to the twelve months ended December 31, 2019. A similar discussion and analysis that compares the twelve months ended December 31, 2019, to the twelve months ended December 31, 2018, can be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2019 Annual Report on Form 10-K filed with the SEC on February 19, 2020.

A reconciliation of our reportable segments to our consolidated results can be found in Note 9, Segment Reporting, in Part II, Financial Information of this Annual Report on Form 10-K.

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Consolidated Results of Operations—Twelve Months Ended December 31, 2020 Compared to Twelve Months Ended December 31, 2019

Total revenues and related costs. Total transportation revenues increased driven by significant pricing increases in our ocean and air freight service lines and increased LTL volumes. Ocean pricing increased significantly in the second half of 2020 as improving demand outpaced carrier capacity returning to the market. In addition, a significant decline in capacity due to a reduction in commercial flights from COVID-19 restrictions resulted in sharp increases in air freight pricing. These increases were partially offset by lower pricing in LTL and truckload services. Total purchased transportation and related services increased due to increased cost of transportation in most of our transportation services resulting from the factors discussed above.

Our sourcing total revenues and purchased products sourced for resale increased due to higher pricing and costs per case, which was partially offset by lower case volume most notably in the foodservice industry, which has been significantly impacted by the COVID-19 pandemic.

Gross profits and adjusted gross profits. Our transportation adjusted gross profit decreased driven by adjusted gross profit margin declines in truckload services due to tight carrier capacity in the marketplace and the significant transportation cost volatility resulting from the impact of the COVID-19 pandemic relative to our contractual customer pricing. We continued to meet our customer commitments despite increases for the cost of capacity, which has resulted in adjusted gross profit margin compression. Partially offsetting these declines was an increase in air freight pricing resulting in adjusted gross profit margin expansion as we were able to leverage our contractual air freight capacity despite significant shortages in the air freight market. Sourcing adjusted gross profits declined driven by the costs of purchased products sourced for resale increasing at a faster rate than our sourcing total revenues in addition to lower case volumes.

Operating exp****enses. Personnel expenses decreased primarily due to cost savings initiatives, including the temporary suspension of the company match to retirement plans for U.S. and Canadian employees, declines in healthcare costs, lower variable compensation and a decrease in average headcount. Other SG&A expenses decreased driven by the elimination of all non-essential travel. Partially offsetting this decrease was an increase in occupancy expenses, including those attributable to acquisitions, and an $11.5 million loss on the sale-leaseback of a company-owned data center.

Interest and other expense. Interest and other expense primarily consisted of $49.1 million of interest expense, partially offset by a $3.3 million favorable impact of foreign currency revaluation and realized foreign currency gains and losses in 2020. This compared to a $4.2 million unfavorable impact of foreign currency revaluation and realized foreign currency gains and losses in 2019. Interest expense decreased from 2019 due to lower average borrowings and interest rates.

Provision for income taxes. Our effective income tax rate was 19.4 percent in 2020 and 22.3 percent in 2019. The effective income tax rate for the twelve months ended December 31, 2020, was lower than the statutory federal income tax rate primarily due to the tax impact of share-based payment awards, including the tax benefit from the delivery of a one-time deferred stock award that was granted to the company's prior Chief Executive Officer in 2000 and excess foreign tax credits. These impacts were partially offset by state income taxes, net of federal benefits and foreign income taxes. The effective income tax rate for the twelve months ended December 31, 2019, was higher than the statutory federal income tax rate due to state income taxes, net of federal benefit, and foreign income taxes, but was partially offset by the tax impact of excess foreign tax credits and share-based payment awards.

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NAST Segment Results of Operations

Twelve Months Ended December 31,
(dollars in thousands)20202019% change2018% change
Total revenues$11,312,553$11,283,6920.3%$12,346,757(8.6)%
Costs and expenses:
Purchased transportation and related services9,795,4629,486,3233.3%10,440,496(9.1)%
Personnel expenses624,358698,187(10.6)%749,120(6.8)%
Other selling, general, and administrative expenses384,258376,4192.1%335,29712.3%
Total costs and expenses10,804,07810,560,9292.3%11,524,913(8.4)%
Income from operations$508,475$722,763(29.6)%$821,844(12.1)%
Twelve Months Ended December 31,
20202019% change2018% change
Average headcount6,8117,354(7.4)%7,387(0.4)%
Service line volume statistics
Truckload—%(2.0)%
LTL9.5%3.5%
Adjusted gross profits(1)
Truckload$981,420$1,275,199(23.0)%$1,375,361(7.3)%
LTL452,033471,616(4.2)%466,7251.0%
Other83,63850,55465.4%64,175(21.2)%
Total adjusted gross profits$1,517,091$1,797,369(15.6)%$1,906,261(5.7)%

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

Twelve Months Ended December 31, 2020 Compared to Twelve Months Ended December 31, 2019

Total revenues and related costs. NAST total revenues increased due to the acquisition of Prime, which added one percentage point to NAST total revenues. This increase was partially offset by declines in truckload total revenues driven by lower pricing in the first half of 2020 and significantly lower fuel prices in 2020. NAST cost of transportation and related services increased driven by increased cost per mile in truckload services and was partially offset by significantly lower fuel prices.

Gross profits and adjusted gross profits. NAST adjusted gross profits decreased driven, primarily, by lower adjusted gross profit per shipment in truckload and LTL services. The lower adjusted gross profit per shipment in truckload was driven by the tight carrier capacity in the marketplace and the significant transportation cost volatility resulting from the impact of the COVID-19 pandemic relative to our contractual customer pricing. We continued to meet our customer commitments despite increases for the cost of capacity, which has resulted in adjusted gross profit margin compression. Our average truckload linehaul rate per mile charged to our customers, which excludes fuel surcharges, increased approximately 5.5 percent resulting from the market and business trends discussed above. Our truckload transportation costs, excluding fuel surcharges, increased approximately 11.0 percent.

NAST LTL adjusted gross profits decreased primarily due to reduced adjusted gross profit margins driven by the tight carrier capacity in the marketplace, partially offset by increased volume. The acquisition of Prime Distribution contributed five percentage points of LTL adjusted gross profit growth.

NAST other adjusted gross profits increased primarily due to incremental warehousing services related to the acquisition of Prime.

Operating expenses. NAST personnel expense decreased primarily due to cost savings initiatives, including the temporary suspension of the company match to retirement plans for U.S. and Canadian employees, lower variable compensation, declines in healthcare costs, and a decrease in average headcount. NAST SG&A expenses increased due to the ongoing expenses from the Prime acquisition, which were partially offset by the elimination of all non-essential travel.

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Global Forwarding Segment Results of Operations

Twelve Months Ended December 31,
(dollars in thousands)20202019% change2018% change
Total revenues$3,100,525$2,327,91333.2%$2,487,744(6.4)%
Costs and expenses:
Purchased transportation and related services2,471,5371,793,93737.8%1,943,838(7.7)%
Personnel expenses281,048276,2551.7%284,586(2.9)%
Other selling, general, and administrative expenses172,427177,194(2.7)%167,6945.7%
Total costs and expenses2,925,0122,247,38630.2%2,396,118(6.2)%
Income from operations$175,513$80,527118.0%$91,626(12.1)%
Twelve Months Ended December 31,
20202019% change2018% change
Average headcount4,7084,766(1.2)%4,7111.2%
Service line volume statistics
Ocean0.5%—%
Air(18.0)%(7.0)%
Customs(3.5)%0.5%
Adjusted gross profits(1)
Ocean$349,868$308,06813.6%$312,327(1.4)%
Air146,056101,99143.2%111,038(8.1)%
Customs87,09291,833(5.2)%88,5153.7%
Other45,97232,08443.3%32,0260.2%
Total adjusted gross profits$628,988$533,97617.8%$543,906(1.8)%

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

Twelve Months Ended December 31, 2020 compared to Twelve Months Ended December 31, 2019

Total revenues and related costs. Total revenues and related costs increased driven by higher pricing and costs in the ocean and air freight markets which were significantly impacted by the COVID-19 pandemic as discussed above. Ocean pricing and purchased transportation costs increased significantly in the second half of 2020 as improving demand outpaced carrier capacity returning to the market. The air freight market has been significantly impacted by reduced cargo capacity due to fewer commercial flights, an increase in charter flights, and larger than normal shipment sizes which has created an environment with unusually high pricing and purchased transportation costs.

Gross profits and adjusted gross profits. Global Forwarding adjusted gross profits increased driven by the significant increase in air freight and ocean pricing due to the impact of the COVID-19 pandemic. The air freight market has been significantly impacted by reduced cargo capacity due to fewer commercial flights, an increase in charter flights, and larger than normal shipment sizes which has created an environment with unusually high pricing. The price for ocean services has also increased significantly due to tight ocean carrier capacity. These increases were partially offset by volume declines in air freight. Customs adjusted gross profits decreased driven by decreased volumes.

Operating expenses. Personnel expenses increased driven by an increase in incentive compensation but was partially offset by a decrease in average headcount. SG&A expenses decreased driven by the elimination of non-essential travel, partially offset by an increase in credit loss expense.

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All Other and Corporate Segment Results of Operations

All Other and Corporate includes our Robinson Fresh and Managed Services segment, as well as Other Surface Transportation outside of North America and other miscellaneous revenues and unallocated corporate expenses.

Twelve Months Ended December 31,
(dollars in thousands)20202019% change2018% change
Total revenues$1,794,028$1,697,9035.7%$1,796,671(5.5)%
Income from operations(10,720)(13,314)N/M(1,387)N/M
Adjusted gross profits(1)
Robinson Fresh105,700109,183(3.2)%116,283(6.1)%
Managed Services94,82883,36513.8%78,7895.8%
Other Surface Transportation65,65062,4175.2%59,9964.0%
Total adjusted gross profits$266,178$254,9654.4%$255,068—%

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

Twelve Months Ended December 31, 2020 compared to Twelve Months Ended December 31, 2019

Total revenues and related costs. Total revenues and related costs increased driven by increased pricing in our Robinson Fresh business, which was partially offset by decreased demand from customers in the foodservice industry resulting from the COVID-19 pandemic, and to a lesser extent, an increase in Other Surface Transportation and Managed Services.

Gross profits and adjusted gross profits. Robinson Fresh adjusted gross profits decreased driven by reduced case volumes, most notably from customers in the foodservice industry. Managed Services adjusted gross profits increased driven by a combination of new customer wins and selling additional services to existing customers. Other Surface Transportation adjusted gross profits increased primarily driven by the acquisition of Dema Service, which contributed three percentage points of growth in Other Surface Transportation.

LIQUIDITY AND CAPITAL RESOURCES

We have historically generated substantial cash from operations, which has enabled us to fund our organic growth while paying cash dividends and repurchasing stock. In addition, we maintain the following debt facilities as described in Note 4, Financing Arrangements (dollars in thousands):

DescriptionCarrying Value as of December 31, 2020Borrowing CapacityMaturity
Revolving credit facility$—$1,000,000October 2023
Senior Notes, Series A175,000175,000August 2023
Senior Notes, Series B150,000150,000August 2028
Senior Notes, Series C175,000175,000August 2033
Senior Notes (1)593,301600,000April 2028
Total debt$1,093,301$2,100,000

(1) Net of unamortized discounts and issuance costs.

We expect to use our current debt facilities and potentially other indebtedness incurred in the future to assist us in continuing to fund working capital, capital expenditures, possible acquisitions, dividends, and share repurchases.

Cash and cash equivalents totaled $243.8 million as of December 31, 2020, and $447.9 million as of December 31, 2019. Cash and cash equivalents held outside the United States totaled $230.9 million as of December 31, 2020, and $405.1 million as of December 31, 2019. Working capital increased from $1.08 billion at December 31, 2019, to $1.10 billion at December 31, 2020.

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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.

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

Twelve months ended December 31,20202019% change2018% change
Sources (uses) of cash:
Cash provided by operating activities$499,191$835,419(40.2)%$792,8965.4%
Capital expenditures(54,009)(70,465)(63,871)
Acquisitions(223,230)(59,200)(5,315)
Other investing activities5,52516,636(3,622)
Cash used for investing activities(271,714)(113,029)140.4%(72,808)55.2%
Repurchase of common stock(177,514)(309,444)(300,991)
Cash dividends(209,956)(277,786)(265,219)
Net payments on debt(143,000)(112,000)(118,988)
Other financing activities89,80347,97730,021
Cash used for financing activities(440,667)(651,253)(32.3)%(655,177)(0.6)%
Effect of exchange rates on cash and cash equivalents9,128(1,894)(20,186)
Net change in cash and cash equivalents$(204,062)$69,243$44,725

Cash flow from operating activities. The decrease in cash flow from operating activities in 2020 from 2019 was primarily due to unfavorable changes in working capital. The unfavorable changes in working capital were primarily related to a sequential increase in accounts receivable associated with increasing pricing in a number of service lines during 2020. Given the COVID-19 pandemic, we are closely monitoring credit and collections activities to minimize risk as well as working with our customers to facilitate the movement of goods across their supply chains while also ensuring timely payment.

Cash used for investing activities. Our investing activities consist primarily of capital expenditures and cash paid for acquisitions. Capital expenditures consisted primarily of investments in information technology, which are intended to increase employee productivity, automate interactions with our customers and contracted carriers, and improve our internal workflows to help expand our adjusted operating margins and grow the business. During 2019, we sold a facility we owned in Chicago, Illinois for approximately $17.0 million.

In 2020, we used $222.7 million for the acquisition of Prime. In 2019, we used $45.0 million for the acquisition of Space Cargo and $14.2 million for the acquisition of Dema Service.

We anticipate capital expenditures in 2021 to be approximately $55 million to $65 million.

Cash used for financing activities. We had net repayments on debt of $143.0 million in 2020 and $112.0 million in 2019. The 2020 and 2019 net repayments were primarily to reduce the outstanding balance of the receivables securitization facility (the "Facility"). This Facility expired in December 2020 and was not renewed. There was no outstanding balance on our senior unsecured revolving credit facility (the "Credit Agreement") as of December 31, 2020 and 2019. As of December 31, 2020, we were in compliance with all of the covenants under the Credit Agreement, note purchase agreement, and senior unsecured notes.

The decrease in cash dividends paid was the result of our fourth quarter dividend being paid on January 4, 2021. The decrease in share repurchases in 2020 was due to the temporary suspension of our share repurchase activity near the end of the first quarter of 2020 as we assessed the impacts of the COVID-19 pandemic. We resumed our repurchase activity in the fourth quarter of 2020. In May 2018, the Board of Directors increased the number of shares authorized to be repurchased by 15,000,000 shares. As of December 31, 2020, there were 7,789,752 shares remaining for future repurchases. The number of shares we repurchase, if any, during future periods will vary based on our cash position, potential alternative uses of our cash, and market conditions. We may seek to retire or purchase our outstanding Senior Notes through open market cash purchases, privately negotiated transactions, or otherwise.

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Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe that, assuming no change in our current business plan, our available cash, together with expected future cash generated from operations, the amount available under our credit facilities, and credit available in the market, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends for at least the next 12 months. We also believe we could obtain funds under lines of credit or other forms of indebtedness on short notice, if needed.

Recently Issued Accounting Pronouncements. Refer to Note 14, Recently Issued Accounting Pronouncements, of the accompanying consolidated financial statements for a discussion of recently issued accounting pronouncements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We consider the following items in our consolidated financial statements to require significant estimation or judgment.

REVENUE RECOGNITION. At contract inception, we assess the goods and services promised in our contracts with customers and identify our performance obligations to provide distinct goods and services to our customers. Our transportation and logistics service arrangements often require management to use judgment and make estimates that impact the amounts and timing of revenue recognition.

Transportation and Logistics Services - As a global logistics provider, our primary performance obligation under our customer contracts is to utilize our relationships with a wide variety of transportation companies to efficiently and cost-effectively transport our customers’ freight. Revenue is recognized for these performance obligations as they are satisfied over the contract term, which generally represents the transit period. The transit period can vary based upon the method of transport, generally a number of days for over the road, rail, and air transportation, or several weeks in the case of an ocean shipment.

Recognizing revenue for contracts where the transit period is partially complete or completed and not yet invoiced at period end requires management to make judgments that affect the amounts and timing of revenue recognized at period end. At December 31, 2020 we recorded revenue of $197.2 million for services we have provided while a shipment was still in-transit but for which we had not yet completed our performance obligation or had not yet invoiced our customer compared to $132.9 million at December 31, 2019. We utilize our historical knowledge of shipping lanes and estimated transit times to determine the transit period in cases where our customers’ freight has not reached its intended destination. In addition, we analyze contract data for the first few days following the reporting date combined with our historical experience of trends related to partially completed contracts as of the reporting date to determine our right to consideration for the services we have provided where the transit period is partially complete or completed and not yet invoiced at period end. Differences in contract data for the first few days following the reporting date compared with our historical experience or disruptions such as weather events or other delays could cause the actual amount of revenue earned at period end to differ from these estimates.

Total revenues represent the total dollar value of revenue recognized from contracts with customers for the goods and services we provide. Substantially all of our revenue is attributable to contracts with our customers. 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 primarily responsible for fulfilling the promise to provide the specified good or service to our customer and we have discretion in establishing the price for the specified good or service. Additionally, in our sourcing business, in some cases we take inventory risk before the specified good has been transferred to our customer. Customs brokerage, managed services, freight forwarding, and sourcing managed procurement transactions 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. See also Note 1, Summary of Significant Accounting Policies, for further information regarding our revenue recognition policies.

GOODWILL. Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible 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

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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 One Analysis”). As part of our Step Zero Analysis, we considered the impacts of the COVID-19 pandemic on financial markets and our business operations and determined that the more likely than not criteria had not been met, and therefore a Step One Analysis was not required.

When we perform a Step One 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.

In the Step One 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 One Analysis is performed.

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, 2020 (dollars in thousands):

20212022202320242025ThereafterTotal
Senior notes (1)$25,200$25,200$25,200$25,200$25,200$657,750$783,750
Long-term notes payable(1)21,38821,388196,38814,44014,440408,570676,614
Maturity of lease liabilities(2)75,62469,98057,59739,54729,935104,455377,138
Purchase obligations(3)102,79939,22535,34923,6491,658210202,890
Total$225,011$155,793$314,534$102,836$71,233$1,170,985$2,040,392

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

(2) We maintain operating leases for office space, warehouses, office equipment, and a small number of intermodal containers. See Note 11, Leases, for further information.

(3) Purchase obligations include agreements for services that are enforceable and legally binding and that specify all significant terms. As of December 31, 2020, such obligations primarily include ocean and air freight capacity, telecommunications services, maintenance contracts, and information technology related capacity. In some instances our contractual commitments may be usage based or require estimates as to the timing of cash settlement.

We have no financing lease obligations. Long-term liabilities consist primarily of noncurrent taxes payable and long-term notes payable. Due to the uncertainty with respect to the amounts or timing of future cash flows associated with our unrecognized tax benefits at December 31, 2020, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $42.3 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 5, Income Taxes, to the consolidated financial statements for a discussion on income taxes. As of December 31, 2020, we do not have significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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