Expeditors International of Washington, Inc. — Q3 2013 Form 10-Q
Business context and period. The company is a non-asset-based global logistics provider, including air and ocean freight forwarding, customs brokerage and related services. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,535.1 | $1,531.7 | $4,446.0 | $4,448.0 |
| Net revenue (company-defined non-GAAP) | $482.0 | $465.1 | $1,396.4 | $1,365.4 |
| Operating income | $146.3 | $145.1 | $418.4 | $402.8 |
| Net earnings attributable to shareholders | $92.4 | $88.5 | $265.0 | $249.2 |
| Diluted EPS | $0.45 | $0.42 | $1.28 | $1.17 |
| Operating income as % of net revenue | 30.4% | 31.2% | 30.0% | 29.5% |
Q3 revenue was nearly flat year over year, while net revenue rose about 4%, operating income about 1%, and shareholder earnings about 4%. For the first nine months, revenue was essentially unchanged; net revenue rose about 2%, operating income about 4%, and shareholder earnings about 6%. The effective tax rate declined to 38.4% in Q3 and 38.8% year to date, from 40.4% and 40.2%, respectively. Q3 diluted EPS increased to $0.45 from $0.42.
Cash, liquidity and capital
- Nine-month operating cash flow was $345.6 million, versus $309.4 million in 2012. Capital expenditures were $42.7 million, versus $37.1 million.
- At September 30, cash and cash equivalents were $1,310.3 million and short-term investments were $99.8 million. Working capital was $1,634 million. The company reported no long-term debt.
- Nine-month investing cash outflow was $141.3 million, including $99.7 million used for net purchases of short-term investments. Financing cash outflow was $142.2 million, including $125.2 million of share repurchases and $61.9 million of dividends, partly offset by stock issuance proceeds.
- Management estimated 2013 capital expenditures at approximately $55 million and stated that cash and operating cash flow should meet liquidity needs for at least 12 months and the foreseeable future.
- The board declared a $0.30-per-share semiannual dividend on November 4, 2013, payable December 16, 2013.
Material changes and operating trends
- Airfreight net revenue increased 7% in Q3, supported by 3% tonnage growth and a 4% increase in net revenue per kilo; year-to-date airfreight net revenue rose 3%.
- Ocean net revenue declined 1% in Q3 despite 9% container-volume growth. Ocean consolidation net revenue fell 8%, as net revenue per container dropped 16%, primarily on exports from China. Year-to-date ocean net revenue increased 1%.
- Customs brokerage and other-services net revenue rose 4% in Q3 and 2% year to date, with higher volumes; management cited cost and margin pressure in domestic time-definite transportation services.
- Q3 overhead increased, including higher salaries, depreciation and other operating costs. Year-to-date other overhead was lower partly because 2012 included a €4.14 million ($5.5 million) European Commission fine related to anti-competitive behavior.
- Foreign currency translation reduced nine-month comprehensive income; accumulated other comprehensive income turned to a $6.2 million loss at quarter-end from $5.7 million income at December 31, 2012.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management described continued pricing pressure, excess ocean-carrier capacity, volatile freight rates and volumes, and uncertain global economic conditions. The company noted that results are seasonally stronger in the third and fourth quarters historically, but cautioned that patterns may not continue.
- Estimated 2013 capital spending is approximately $55 million. On October 7, CEO Peter J. Rose announced plans to retire effective March 1, 2014, and expects to remain chairman through the May 2015 annual meeting. The company estimates an approximately $8 million retirement bonus, to be recorded as compensation expense in Q4 2013.
- Management reported ordinary-course legal matters with no expected significant effect, but could not estimate any additional reasonably possible losses beyond recorded amounts. Standby letters of credit and guarantees totaled $99 million; management said underlying obligations are recorded by subsidiaries and no additional expense would be needed in the unlikely event of a parent-company call.
- Risks include CEO succession and retention of key personnel, intense competition and margin pressure, exposure to carrier capacity and financial stability, international trade and political developments, foreign exchange movements, and customer credit risk. A hypothetical 10% weakening of the U.S. dollar would have increased nine-month operating income by approximately $29 million; a 10% strengthening would have reduced it by approximately $24 million, before behavioral effects.
Important facts for investors to verify
- Whether ocean pricing and net revenue per container stabilize, particularly for China-related exports, and whether volume growth can offset rate pressure.
- The CEO succession plan, timing and final accounting for the estimated $8 million retirement bonus.
- Execution of the approximately $55 million capital-spending plan and continued operating cash conversion amid seasonal working-capital needs.
- Developments in the European Commission matter and other legal or regulatory contingencies, including any losses beyond recorded accruals.
- Foreign exchange, carrier capacity and credit risks, and the composition and liquidity of cash and short-term investments.