Expeditors International of Washington, Inc. — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Expeditors is a non-asset-based global logistics provider. Dollar amounts below are in millions, except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2,020.1 | $1,854.3 | +8.9% |
| Net revenue (company-defined non-GAAP) | $654.1 | $635.8 | +2.9% |
| Operating income | $187.6 | $192.8 | -2.7% |
| Net earnings attributable to shareholders | $139.7 | $135.7 | +3.0% |
| Diluted EPS | $0.80 | $0.76 | +5.3% |
| Cash from operating activities | $289.5 | $235.5 | +$54.0 |
Operating income was 28.7% of net revenue, versus 30.3% a year earlier. The effective tax rate fell to 28.3% from 31.1%, benefiting from share-based compensation deductions, partly offset by nondeductible expenses under the 2017 Tax Act.
Business trends and material changes
- Airfreight net revenue declined 6%, reflecting a 4% decline in tonnage and a 1% decrease in net revenue per kilo; higher buy rates were not fully offset by sell rates.
- Ocean freight and services net revenue rose 5%, primarily on 6% container-volume growth. Customs brokerage and other services net revenue increased 8%, driven by customs brokerage, road freight, and distribution volumes.
- Total revenue growth outpaced net revenue growth, while overhead expenses rose 5% to $466.5 million. Salaries and related costs increased 5%; other overhead increased 6%, including technology, occupancy, claims, and consulting costs.
- Operating cash flow benefited principally from customer collections exceeding billings. Working capital was $1.501 billion at quarter-end.
- The company repurchased 0.6 million shares for $44.3 million, compared with 2.7 million shares for $172.4 million in Q1 2018.
Balance sheet, liquidity, and cash flows
- Cash and cash equivalents were $1.189 billion at March 31, 2019, up from $923.7 million at year-end. Current assets were $2.729 billion and current liabilities $1.228 billion.
- Expeditors reported no long-term debt apart from operating lease liabilities. Lease liabilities totaled $348.2 million, including $58.6 million current and $289.6 million noncurrent. The company adopted the new lease standard on January 1, 2019, recording $343 million of right-of-use assets and $340 million of lease liabilities at adoption, with no retained-earnings impact.
- Investing activities used $9.2 million, primarily for capital expenditures; management estimated 2019 capital expenditures of approximately $50 million. Financing activities used $17.1 million.
- Management said cash and operating cash flows should be sufficient for liquidity needs for at least the next 12 months and the foreseeable future. Cash held by non-U.S. subsidiaries was $496 million, including $7 million in U.S. banks.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects investment in people, processes, technology, and strategic growth initiatives to continue, and notes that first-quarter results have historically been seasonally weaker.
- Management cited uncertainty around U.S.-China tariffs and trade negotiations, Brexit, global trade and economic conditions, fuel costs, currency movements, and changing consumer demand. Capacity imbalances and carrier pricing volatility may pressure freight margins; new marine-fuel sulfur requirements effective in 2020 were expected to raise carrier costs.
- Carrier financial stability and capacity, competition, customer pricing demands, and customers’ ability to pay are additional risks. Management noted that carrier industry leverage and liquidity challenges require careful selection of providers.
- Foreign currency losses were approximately $3 million in Q1 2019; the company had no currency derivatives outstanding. A hypothetical 10% U.S. dollar weakening would have increased operating income by approximately $13 million, while a 10% strengthening would have reduced it by approximately $11 million, before considering changes in shipping patterns.
- Standby letters of credit and guarantees totaled $70 million. Ordinary-course legal matters were not expected by management to have a significant effect; recorded accruals were not significant, and possible additional losses could not be estimated.
- After quarter-end, the board declared a semiannual dividend of $0.50 per share, payable June 17, 2019.
Important facts for investors to verify
- Whether airfreight volume and yield pressures persist, and whether ocean and customs-related growth can sustain net revenue gains.
- How carrier buy rates, capacity, fuel costs, and 2020 marine-fuel rules affect margins and the ability to pass costs to customers.
- Whether Q1’s working-capital-driven operating cash flow is repeatable given seasonal receivable and billing patterns.
- The effects of trade-policy changes, global economic conditions, currency movements, and customer payment terms on volumes, pricing, and cash advances.
- Lease obligations, planned capital spending, share repurchases, and the company’s continuing liquidity position.