Expeditors International of Washington, Inc. — Q3 2015 Form 10-Q
Business and period: Global, non-asset-based logistics provider offering air and ocean freight forwarding, customs brokerage and related services. This filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Unless noted, figures below are in millions of dollars. “Net revenue” is the company’s non-GAAP measure of revenue less directly related transportation expenses.
Key financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $1,651.3 | $1,705.1 | $5,020.4 | $4,795.9 |
| Net revenue | $570.0 | $513.3 | $1,651.6 | $1,462.6 |
| Operating income | $191.9 | $159.1 | $543.5 | $436.8 |
| Operating income / net revenue | 33.7% | 31.0% | 32.9% | 29.9% |
| Net earnings attributable to shareholders | $118.3 | $102.4 | $342.8 | $277.5 |
| Diluted EPS | $0.62 | $0.53 | $1.79 | $1.40 |
| Operating cash flow | $132.7 | $86.7 | $448.8 | $305.4 |
- Q3 total revenue declined 3%, while net revenue rose 11%, operating income rose 21%, and diluted EPS rose 17% year over year. For the first nine months, total revenue increased 5%, net revenue 13%, operating income 24%, and diluted EPS 28%.
- Net revenue mix in Q3: airfreight $195.4 million, ocean freight and services $143.9 million, and customs brokerage and other services $230.6 million. Their respective net-revenue margins were 34%, 25%, and 41%.
- Operating expenses grew more slowly than net revenue overall. Salaries and related costs increased 8% in Q3 and 9% year to date, mainly from higher bonuses and employee count. The effective tax rate was 38.0% for Q3 and 37.6% year to date.
Balance sheet, cash flow and capital allocation
- At September 30, cash and cash equivalents were $968.7 million and short-term investments were $8.3 million. Working capital was $1.28 billion. The company reported no long-term debt.
- Nine-month operating cash flow was $448.8 million, up $143.4 million year over year, which management attributed primarily to better working capital and higher earnings. Capital expenditures were $31.9 million; management estimated full-year 2015 capital expenditures of $70 million, including real estate development.
- Nine-month financing cash outflow was $368.6 million, including $415.5 million of share repurchases and $68.8 million of dividends, partly offset by stock issuance proceeds. Shares outstanding were 186.2 million at quarter-end, versus 191.7 million at December 31, 2014. A $0.36-per-share semiannual dividend was declared after quarter-end.
- Accumulated other comprehensive loss increased to $74.1 million, primarily reflecting foreign-currency translation. Cash held by non-U.S. subsidiaries was $560 million; the filing says foreign exchange controls may affect repatriation in some countries.
Performance drivers, outlook and risks
- Airfreight Q3 revenue fell 4% as lower sell rates outweighed 3% tonnage growth; net revenue increased 15%, aided by favorable spot-market buy rates. Ocean revenue fell 7% with flat container volumes and lower sell rates, but ocean net revenue rose 15% on improved yields and buying opportunities. Customs and other services revenue grew 3% and net revenue grew 5%, reflecting higher customer volumes.
- Management expects competitive pricing pressure and volatility in freight volumes, buy and sell rates, and yields to continue. It noted carrier overcapacity, uncertain global economic conditions, changing customer demand, fuel-price uncertainty, port disruptions, currency movements, and political and regulatory developments as relevant risks. Lower oil prices were expected to reduce gross revenue and costs; management did not expect a significant adverse effect on net revenue.
- Management said existing cash and operating cash flow should meet liquidity needs for at least the next 12 months and the foreseeable future. The company was contingently liable for $78 million of standby letters of credit and guarantees; management did not expect ordinary-course legal matters to have a significant financial effect, but could not estimate possible additional losses.
- Foreign exchange losses contributed to a Q3 decline in other income/expense versus 2014; total net foreign-currency results across revenue, operating expenses and other items were nevertheless approximately $4 million of gains for Q3 and $6 million for the nine months. The company had no foreign-currency derivatives outstanding. A hypothetical 10% U.S. dollar weakening would have increased nine-month operating income by about $40 million; a 10% strengthening would have reduced it by about $32 million, based on the filing’s sensitivity analysis.
- No specific earnings or revenue guidance was provided. Management cited historical seasonality, with Q1 typically weakest and Q3/Q4 typically strongest, while cautioning that this pattern is not assured. The company is implementing a worldwide accounting-system replacement over several years; management reported effective disclosure controls and no material control changes during the quarter.
Most important facts for investors to verify
- Whether improved freight yields and favorable spot-market buy rates persist as carrier capacity, demand and competitive pricing change.
- How much of the increase in net revenue and earnings reflects sustainable volume or margin improvement versus favorable market conditions and lower share count from repurchases.
- Whether working-capital cash generation, the $70 million capital-spending estimate, and the company’s liquidity outlook remain on track.
- The potential effects of currency movements, foreign cash repatriation limits, carrier financial stability, and the $78 million of guarantees and standby letters of credit.
- Progress and control effectiveness as the worldwide accounting-system implementation continues.