Expeditors International of Washington, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Expeditors is a non-asset-based global logistics provider, offering air and ocean freight forwarding, customs brokerage, and related services.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1,531.7 million | $1,606.4 million | $4,448.0 million | $4,648.6 million |
| Net revenue | $465.1 million | $493.8 million | $1,365.4 million | $1,420.3 million |
| Operating income | $145.1 million | $163.8 million | $402.8 million | $463.3 million |
| Net earnings attributable to shareholders | $88.5 million | $106.6 million | $249.2 million | $292.8 million |
| Diluted earnings per share | $0.42 | $0.50 | $1.17 | $1.36 |
| Cash from operating activities | $69.2 million | $93.3 million | $309.4 million | $349.2 million |
Net revenue, which excludes transportation costs passed through to carriers, declined 5.8% in Q3 and 3.9% year to date. Operating income fell 11.4% and 13.1%, respectively; operating income as a share of net revenue was 31% versus 33% in Q3 and 29% versus 33% year to date. The effective tax rate was 40.4% for Q3 and 40.2% year to date, up from 39.7% and 39.3%.
At September 30, cash and cash equivalents were $1,367.6 million, working capital was approximately $1,574 million, and the company had no long-term debt. Total assets were $3,032.2 million and total equity was $2,095.7 million. Nine-month capital expenditures were $37.1 million; management estimated full-year 2012 capital expenditures at approximately $50 million.
Material changes and management commentary
- Airfreight net revenue declined 16% in Q3 and 12% year to date. Management attributed the year-to-date decline mainly to airfreight tonnage down 9% and net revenue per kilo down 3%, amid a weaker global airfreight market and reduced project-related shipments.
- Ocean freight and services net revenue declined 1% in both periods. Ocean consolidation net revenue fell 6% in Q3 and 7% year to date, reflecting lower revenue per container and, in Q3, lower container volume. Direct ocean forwarding grew, while customs brokerage and other services increased 1% in Q3 and 3% year to date.
- Management cited uncertain global economic conditions, customer and carrier pricing pressure, volatile fuel costs, and currency movements, and expected similar trends to continue near term absent meaningful economic improvement. The filing gives no quantified earnings or revenue forecast.
- Operating cash flow was lower year over year, primarily because of lower earnings and working-capital changes. Financing cash use increased, mainly due to share repurchases. The company repurchased $193.5 million of shares and paid $59.4 million in dividends during the first nine months. A subsequent $0.28-per-share dividend was declared for payment in December 2012.
- Other income declined, principally because foreign-exchange losses in 2012 replaced gains in 2011. The European Commission’s anti-competitive-behavior finding resulted in a €4.14 million ($5.5 million) fine, contributing to higher year-to-date overhead expenses.
Liquidity, risks, and contingencies
Management said cash and operating cash flows should be sufficient for foreseeable capital and liquidity needs. International bank lines provided $15 million of available borrowing capacity. The company had $102 million of contingent standby letters of credit and guarantees, primarily supporting foreign subsidiaries’ ordinary-course carrier and customs-related obligations.
The DOJ confirmed on October 17, 2012 that Expeditors was no longer a subject of its air-cargo anti-competitive-behavior investigation. Separate DOJ and Commerce Department subpoenas concern third-party exports or re-exports to a U.S.-embargoed country. The company has responded; management did not expect any resulting fines or penalties to materially affect results or cash flows, though the outcome is uncertain. Other recorded legal accruals were not significant, and the company could not estimate additional reasonably possible losses.
Foreign-exchange exposure is a key market risk. Management estimated that a hypothetical 10% weakening of the U.S. dollar over the first nine months would have increased operating income by approximately $29 million, while a 10% strengthening would have reduced it by approximately $23 million. The company had no foreign-currency derivatives outstanding. Management also identified competition, carrier capacity and financial stability, trade and regulatory changes, customer demand, and global political and economic conditions as risks. Disclosure controls were reported effective, with no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether airfreight tonnage, pricing per kilo, and ocean consolidation yields stabilize after the reported declines.
- Track net-revenue trends and overhead as a share of net revenue, especially employee costs and the effect of the European Commission fine.
- Review operating cash conversion and working-capital movements through peak season, alongside the company’s capital-spending estimate.
- Monitor share repurchases, dividends, and the outstanding-share count; confirm the status and any developments in the embargo-related investigations.
- Assess currency sensitivity and the availability of foreign cash, including potential constraints on repatriation.