Expeditors International of Washington, Inc. — Q1 2016 Form 10-Q
Business context and period: Global, non-asset-based logistics provider. This filing reports the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $1,418.5 | $1,677.5; down 15% |
| Net revenue (non-GAAP) | $517.1 | $529.5; down 2% |
| Operating income | $151.8 | $168.9; down 10% |
| Operating income / net revenue | 29% | 32% |
| Net earnings attributable to shareholders | $96.6 | $106.7; down 9% |
| Diluted EPS | $0.53 | $0.55 |
| Operating cash flow | $236.0 | $134.4 |
| Capital expenditures | $14.0 | $9.4 |
Airfreight net revenue fell 12%, reflecting a 9% decline in tonnage and a 4% decline in net revenue per kilo. Ocean net revenue rose 9%, with consolidation yields improving despite a 3% volume decline. Customs brokerage and other net revenue was essentially flat. Salaries and related costs rose 2%; as a share of net revenue, they increased to 55% from 53%. The effective tax rate was 37.6%, versus 37.5%.
At March 31, cash and cash equivalents were $1,013.9 million; working capital was $1,233 million. The company had no long-term debt. Operating cash flow increased primarily because of working-capital movements, including a $112.7 million decrease in accounts receivable. Cash used for share repurchases was $70.3 million; proceeds from stock-option exercises were $41.6 million.
Material changes and management commentary
- Airfreight revenue declined 21%, amid competitive pricing, lower average sell rates and lower tonnage. Management cites carrier capacity and customer efforts to reduce logistics costs as continuing influences.
- Ocean revenue declined 20%, but related expenses fell 27% as buy rates decreased amid carrier overcapacity; net revenue improved. Management expects pricing volatility and notes carrier liquidity challenges and competitive bids may pressure revenue and yields.
- Lower 2015 airfreight comparisons partly reflect temporary U.S. West Coast port disruptions that shifted some customer shipments from ocean to air.
- Management says Q1 is historically the weakest quarter and peak activity typically begins in late Q2 or early Q3, but cautions that seasonality may not recur. No earnings or revenue guidance is provided. Management estimates 2016 capital expenditures at $100 million, including real estate development.
Risks, contingencies and notable items
- Competition, customer price pressure, carrier capacity and financial stability, global economic and trade conditions, foreign exchange, and political or regulatory developments may affect results. The company reported approximately $4 million of net foreign-currency losses in Q1 2016, compared with approximately $3 million of gains in Q1 2015.
- Standby letters of credit and guarantees totaled $77 million. Management does not expect ordinary-course legal matters to have a significant effect; accrued amounts were not significant, and additional potential losses could not be estimated.
- Future minimum payments under noncancelable leases totaled $131 million at year-end 2015. A new lease accounting standard is expected to affect the balance sheet; the company was evaluating the full impact.
- The board declared a $0.40-per-share semiannual dividend on May 3, payable June 15, 2016. It also amended the discretionary repurchase authorization to allow reductions in outstanding shares to 170 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. A worldwide accounting-system implementation is underway, with controls tested before new functionality is implemented.
Important facts for investors to verify
- Whether declining airfreight volumes and pricing pressure persist, and whether ocean net-revenue gains continue.
- How Q1 working-capital movements affect cash generation in later quarters, particularly during the seasonal peak.
- Progress toward the $100 million 2016 capital-expenditure estimate and the effects of planned real estate spending.
- Future share repurchases, the effect of the amended authorization, and payment of the declared dividend.
- Any developments in carrier liquidity, foreign-exchange exposure, legal matters, or adoption of new accounting standards.