Expeditors International of Washington, Inc. — Q1 2012 Form 10-Q
Business context and period. The company provides global freight forwarding, customs brokerage and related logistics services through a non-asset-based worldwide network. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011.
Financial performance
- Revenue: $1.411 billion, down 3.4% year over year. Airfreight services revenue fell to $639 million from $701 million; ocean freight and services declined to $434 million from $440 million; customs brokerage and other services rose to $338 million from $320 million.
- Net revenue: $446.6 million, down 1.6% from $453.9 million. Airfreight net revenue decreased 10% as tonnage fell 9%. Ocean net revenue increased 2%, although ocean consolidation net revenue declined 6% as net revenue per container fell 7%. Customs brokerage and other services net revenue increased 5%.
- Profit and margins: Operating income was $125.3 million, down 14.9%; net earnings attributable to shareholders were $76.7 million, down 15.9%. Diluted EPS was $0.36 versus $0.42. Operating income was 28% of net revenue versus 33% a year earlier; net earnings were 17% versus 20%.
- Cash flow: Operating cash flow was $147.4 million versus $177.8 million, primarily reflecting lower earnings and working-capital changes. Capital expenditures were $17.1 million versus $21.1 million. Cash and cash equivalents increased $118.6 million to $1.413 billion.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $1.429 billion; working capital was $1.582 billion. The company reported no long-term debt or short-term borrowings. It had $15 million in international credit lines, unused at quarter-end, and $105 million of contingent standby letters of credit and guarantees.
Changes, outlook and risks
- Management attributed weaker airfreight results to a softer global market and lower project-related tonnage. It expected similar trends near term absent meaningful improvement in economic conditions. Ocean consolidation faced higher carrier buy rates and expected carrier price increases; similar pressure was anticipated near term.
- Salaries and related costs rose 4%, with employee headcount up 5%; other overhead expenses rose 9%, including the European Commission fine. The effective tax rate increased to 40.6% from 39.4%.
- Management estimated 2012 capital expenditures at $100 million, including additional real estate development, and believed cash and operating cash flows would meet foreseeable liquidity needs. The first quarter is historically the company’s weakest season.
- On March 28, 2012, the European Commission fined the company €4.14 million ($5.5 million) over alleged airfreight surcharge conduct; the fine was recorded in Q1 operating expenses. The company continues to cooperate with a longstanding DOJ air-cargo investigation. After quarter-end, it received DOJ and Commerce Department subpoenas concerning possible exports or re-exports by unaffiliated third parties to a U.S.-embargoed country. Potential additional fines, penalties, legal costs or other outcomes could materially affect results or cash flows; the company could not estimate additional loss ranges beyond amounts recorded.
- Foreign exchange, global economic conditions, freight volumes and pricing, customer credit, carrier stability and capacity, and regulatory or political changes remain risks. A hypothetical 10% U.S. dollar weakening would have increased Q1 operating income by about $9 million; a 10% strengthening would have reduced it by about $7 million. No foreign currency derivatives were outstanding.
- Subsequent event: on May 2, 2012, the board declared a semiannual dividend of $0.28 per share, payable June 15 to shareholders of record June 1.
Most important facts to verify
- Whether airfreight tonnage and net revenue stabilize, and whether ocean carrier buy-rate increases further pressure consolidation yields.
- The status and potential financial consequences of the DOJ, BIS and European Commission matters, including whether additional exposure can be estimated.
- Whether planned 2012 capital expenditures of approximately $100 million and the declared dividend are supported by ongoing cash generation.
- How working-capital seasonality, overseas cash balances and contingent guarantees affect available liquidity.