EXPEDITORS INTERNATIONAL OF WASHINGTON INC quarterly report, Q3 FY2017

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Business context and reporting period

Expeditors International of Washington, Inc. is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage and related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Unless otherwise noted, amounts below are in millions of dollars.

Financial performance and liquidity

  • Third quarter: Revenue rose 15.3% to $1,802.2 million. Net revenues, a company-defined non-GAAP measure (revenue less direct service costs), increased 9.9% to $599.1 million. Operating income increased 11.7% to $186.9 million; net earnings attributable to shareholders rose 11.8% to $120.3 million; diluted EPS increased to $0.66 from $0.59.
  • First nine months: Revenue rose 12.6% to $5,019.6 million, while net revenues increased 4.6% to $1,690.4 million. Operating income edged up 0.7% to $501.2 million; shareholder net earnings increased 0.7% to $322.4 million; diluted EPS was $1.77 versus $1.75.
  • Margins: Operating income was 31% of net revenues in Q3, versus 31% a year earlier; for the nine months it was 30%, versus 31%. Airfreight net revenue was 31% of service net revenue in Q3 (32% in 2016) and 31% year to date (33%); ocean was 26% in Q3 (25%) and 25% year to date (25%); customs brokerage and other services was 43% in Q3 (43%) and 44% year to date (42%).
  • Cash flow and investment: Operating cash flow was $85.4 million in Q3 and $362.3 million year to date, down from $115.8 million and $456.9 million, respectively, in 2016. Year-to-date capital expenditures were $67.6 million, versus $40.0 million. Management estimated 2017 capital expenditures of approximately $100 million.
  • Liquidity and debt: Cash and cash equivalents were $1,033.4 million at September 30, 2017, compared with $974.4 million at December 31, 2016. Working capital was $1,443 million, and the company reported no long-term debt. Contractual cash obligations totaled $348.2 million, including $252.3 million of operating leases and $62.5 million of unconditional purchase obligations.
  • Shareholder returns: The company repurchased 6.1 million shares for $340.7 million in the first nine months and paid $75.7 million in dividends. After quarter-end, the board declared a $0.42-per-share semiannual dividend payable December 15, 2017.

Material changes and management commentary

  • Q3 growth was broad-based: airfreight revenue increased 18%, ocean freight and services 14%, and customs brokerage and other services 13%. Air tonnage grew 12%; ocean container volume grew 4%. Higher sell rates contributed to revenue growth, while higher carrier buy rates and capacity constraints pressured margins.
  • Airfreight net revenues grew 6% in Q3 but only 1% year to date, as lower net revenue per kilo offset volume growth. Ocean net revenues rose 12% in Q3 and 4% year to date; third-quarter consolidation results benefited from a 15% increase in net revenue per container and comparison with carrier-related rate disruption in Q3 2016.
  • Year-to-date operating income was nearly flat despite revenue growth. Management cited higher transportation costs, competitive pricing, increased employee and technology investment, and regional margin pressure. Other overhead also reflected $8 million of legal-cost recoveries year to date, compared with $5 million in the prior-year period, and a favorable $6 million indirect-tax contingency resolution in Q2 2017.
  • Management expects continued pricing volatility as customers solicit bids and carriers adjust capacity and pricing. It noted that historically airfreight margins tend to decline in Q4 as seasonal volumes rise and carrier buy rates increase. No specific earnings or revenue guidance was provided.

Outlook, risks and unusual items

  • Management believes cash and operating cash flows will be sufficient for liquidity needs for at least the next 12 months and the foreseeable future. The filing describes seasonality, uncertain global trade and demand, intense competition, freight-rate volatility, carrier capacity and financial stability, foreign-exchange exposure, and customers’ ability to pay as risks.
  • Cash-flow pressure reflected higher accounts receivable associated with revenue growth. The company also cautioned that seasonal increases in customer billings can consume cash.
  • Foreign-currency losses were approximately $3 million for Q3 and $12 million for the first nine months of 2017; no foreign-currency derivatives were outstanding. Management estimated that a hypothetical 10% U.S. dollar weakening over the nine-month period would have increased operating income by approximately $35 million, while a 10% strengthening would have reduced it by approximately $29 million.
  • An $80 million net-book-value Miami property was classified as held for sale; management expected sale proceeds, after costs, to exceed book value. Ordinary-course legal claims and investigations were not expected by management to have a significant effect, though additional possible losses could not be estimated.
  • The company expected to adopt the new revenue standard on January 1, 2018, using the modified retrospective method. It anticipated deferring more revenue and changing certain services from net to gross presentation, but did not expect a material effect on results, financial position or cash flows. The new lease standard is effective January 1, 2019 and will bring leases exceeding one year onto the balance sheet; the filing cites approximately $252 million of future minimum lease payments.
  • A newly highlighted risk concerns network continuity and cybersecurity: disruption, cyberattacks or breaches affecting company systems, service providers or the internet could impair shipment processing, revenue, customer relationships and operations, and generate remediation costs or legal exposure.

Important facts for investors to verify

  1. Whether net-revenue growth and service margins can hold up as carrier buy rates, capacity constraints and competitive sell-rate pressure evolve.
  2. Whether cash conversion improves after the year-to-date decline in operating cash flow and growth in receivables.
  3. Progress and quantified effects of adopting the revenue and lease accounting standards, including any transition adjustment and presentation changes.
  4. Execution of the approximately $100 million 2017 capital-spending plan and sale of the Miami property.
  5. Exposure to carrier financial distress, trade and currency changes, cybersecurity incidents, and the company’s $71 million of standby letters of credit and guarantees.