Expeditors International of Washington, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in millions of dollars except per-share data. Expeditors is a non-asset-based global logistics provider. Its reported revenue includes carrier charges on certain freight-forwarding transactions; management also uses non-GAAP “net revenues,” which exclude directly related transportation expenses.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1,691.6 | $1,599.1 | $3,369.1 | $3,090.8 |
| Net revenues (non-GAAP) | $552.1 | $484.7 | $1,081.6 | $949.3 |
| Operating income | $182.7 | $142.4 | $351.6 | $277.6 |
| Net earnings attributable to shareholders | $117.8 | $91.3 | $224.5 | $175.1 |
| Diluted earnings per share | $0.61 | $0.46 | $1.17 | $0.88 |
| Operating cash flow | $181.7 | $44.9 | $316.1 | $218.7 |
- Q2 year-over-year growth: revenue 5.8%, net revenues 13.9%, operating income 28.3%, and shareholder-attributable earnings 29.0%. For the first half, the respective growth rates were 9.0%, 13.9%, 26.6%, and 28.2%.
- Operating income was 10.8% of reported revenue in Q2, versus 8.9% a year earlier. Management reported operating income at 33% of net revenues versus 29% in Q2 2014. The effective tax rate was 37.4% for Q2 versus 38.2%.
- Q2 net revenues by service: airfreight $186.8 million, up 14%; ocean freight and services $143.4 million, up 27%; customs brokerage and other services $221.9 million, up 7%.
- Six-month operating cash flow increased by $97.4 million. Cash flow less capital expenditures was approximately $293.8 million, compared with $200.3 million in the first half of 2014.
Financial position and capital allocation
- At June 30, cash and cash equivalents were $985.7 million and short-term investments were $47.0 million, totaling $1,032.8 million. Working capital was $1,341.1 million; current assets were $2,334.8 million and current liabilities $993.7 million.
- The company reported no long-term debt. Total liabilities were $1,042.6 million; shareholders’ equity was $1,886.6 million.
- Cash and cash equivalents increased $58.6 million from year-end 2014. First-half capital expenditures were $22.4 million. Management estimated 2015 capital expenditures at $70 million, including real estate development.
- First-half share repurchases were $205.5 million; dividends paid were $68.8 million, or $0.36 per share. Shares outstanding were 189.1 million at June 30, down from 191.7 million at December 31. On August 4, the board expanded discretionary repurchase authorization to reduce shares outstanding to 180 million.
Material changes and management commentary
- Airfreight tonnage rose 9% in Q2 and 11% in the first half. Management attributed some first-half volume to customers shifting freight from ocean to air during U.S. West Coast port disruptions. Favorable spot-market carrier rates supported margins; competitive pressure lowered average sell rates in some regions.
- Ocean container volumes rose 5% in Q2 and 8% in the first half. Ocean net-revenue growth reflected stronger yields and favorable spot buying in Q2, following a 2014 strategy of lowering sell rates to gain market share. Management cautioned that pricing volatility and lower yields could continue.
- Salary and related costs rose 10% in both comparison periods, principally from higher incentive bonuses and increased staffing. As a share of net revenues, these costs declined to 52% from 54%.
- Asia Pacific management was reorganized into North Asia and South Asia; comparative segment information was recast. The company also approved a new stock option plan making 3 million shares available.
Outlook, risks, and contingencies
- No formal earnings or revenue guidance is provided. Management said current cash and operating cash flow should meet capital and liquidity needs for at least the next 12 months and the foreseeable future.
- Management expects competitive pricing pressure, customer demands for lower rates, air-carrier overcapacity, and ocean pricing volatility to persist. Lower oil prices had not materially affected buy and sell rates to date; management expected sustained lower fuel prices to reduce gross revenue and costs, but not to significantly adversely affect net revenues.
- Results remain exposed to global trade and economic conditions, freight volumes, carrier capacity and financial stability, port disruption, competition, seasonality, foreign exchange movements, and customer credit risk. A hypothetical 10% weakening of the U.S. dollar over the first half would have increased operating income by approximately $25 million; a 10% strengthening would have reduced it by approximately $20 million.
- Standby letters of credit and guarantees totaled $68 million. Ordinary-course legal matters were accrued at amounts management described as not significant; additional possible losses could not be estimated. Management reported no material change in risk factors from the 2014 Form 10-K.
- Management concluded disclosure controls were effective. A worldwide accounting-system implementation is underway over several years; the filing says controls for new functionalities are tested before implementation.
Important facts for investors to verify
- Whether the strong Q2 improvement in net revenues and operating margins persists as carrier capacity, sell rates, and spot-market buying conditions change.
- How much of airfreight growth reflected temporary diversion from disrupted West Coast ports, and whether those volumes remain.
- Whether first-half operating cash flow gains are sustainable, given working-capital seasonality and customer receivables.
- Execution and cost of the $70 million 2015 capital plan, and the pace and price of share repurchases under the expanded authorization.
- Exposure to foreign exchange, carrier financial health, and the $68 million of standby letters of credit and guarantees.