Expeditors International of Washington, Inc. — Q2 2012 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2012, compared with the same 2011 periods. Expeditors provides global logistics, freight forwarding and customs brokerage services; it is non-asset-based and does not own or operate aircraft or ships. Financial statement amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1,505 | $1,581 | $2,916 | $3,042 |
| Net revenue (revenue less transportation expenses) | $454 | $473 | $900 | $926 |
| Operating income | $132 | $152 | $258 | $300 |
| Net earnings attributable to shareholders | $84 | $95 | $161 | $186 |
| Diluted EPS | $0.39 | $0.44 | $0.75 | $0.86 |
| Operating income / net revenue | 29% | 32% | 29% | 32% |
- Revenue and earnings: Q2 total revenue declined 4.8% year over year and six-month revenue declined 4.1%. Shareholder earnings fell approximately 11.6% in Q2 and 13.7% for the first half. Declines reflect weaker airfreight and ocean consolidation results, lower operating income, and higher effective tax rates.
- Service trends: Airfreight net revenue fell 11% in both Q2 and the first half, primarily as tonnage declined 10% and 9%, respectively. Ocean and ocean services net revenue decreased 3% in Q2 and 1% for six months; consolidation net revenue was pressured by lower revenue per container. Customs brokerage and other services net revenue rose 2% in Q2 and 4% for six months.
- Margins and costs: Overhead expenses rose to 71% of net revenue from 68% in both comparative periods. Salaries and related costs were 55% of net revenue versus approximately 53%, reflecting more employees and lower net revenue. The effective tax rate was 39.5% in Q2 and 40.0% for six months, versus 38.8% and 39.1% in 2011.
- Cash flow and liquidity: Operating cash flow was $93 million in Q2 and $240 million for six months, compared with $78 million and $256 million a year earlier. Cash and cash equivalents were $1.364 billion at June 30; working capital was $1.522 billion, including cash, cash equivalents and short-term investments of approximately $1.365 billion. The company reported no long-term debt and $14 million available under international bank lines.
- Capital allocation: Six-month capital expenditures were $27 million; management estimated full-year 2012 capital expenditures of $86 million, including real estate development. Six-month repurchases were $106 million and dividends paid were $59 million. The semi-annual dividend was raised to $0.28 per share from $0.25.
- Balance sheet: Total assets were $2.992 billion and total equity was $2.050 billion at June 30, 2012. Cash decreased $49 million during Q2 but increased $70 million over the first six months.
Changes, outlook and risks
- Management attributed the airfreight downturn to weaker global airfreight markets and less customer-specific infrastructure and project tonnage. It expected similar trends to continue in the near term absent meaningful improvement in global economic conditions.
- Ocean consolidation net revenue per container fell 12% in Q2 and 10% in the first half, while container volume rose 1% in both periods. Management said carrier buy-rate increases and reduced market capacity contributed to the decline and expected carriers to continue managing capacity to support rates.
- Other overhead expense for the first half increased 5%, primarily reflecting a European Commission fine of €4.14 million (reported as $5.5 million) for anti-competitive behavior, as well as ongoing legal costs.
- The company continued cooperating with a longstanding DOJ air-cargo antitrust investigation. It also disclosed 2012 DOJ and Commerce Department/BIS subpoenas concerning third-party exports or re-exports to a U.S.-embargoed country. Potential fines, penalties, damages or conduct remedies could materially affect results or cash flows; the company said it could not estimate additional reasonably possible losses, if any, beyond recorded amounts, which were not significant.
- Other exposures include intense pricing competition, uncertain global trade and freight demand, carrier capacity and financial stability, seasonality, currency fluctuations, and customer credit and collection risks. The company reported no foreign currency derivatives outstanding. A hypothetical 10% U.S. dollar weakening or strengthening over the first half would have raised operating income by approximately $19 million or reduced it by approximately $15 million, respectively.
- Management stated that existing cash and operating cash flows should meet foreseeable capital and liquidity requirements, including contingent obligations. Standby letters of credit and guarantees totaled $100 million. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether airfreight tonnage and net revenue stabilize, and whether ocean consolidation yield improves as carrier rates and capacity change.
- The scope, timing and potential financial consequences of the DOJ, BIS and European Commission matters, including future legal costs or penalties.
- Whether the $86 million full-year capital expenditure estimate is achieved and how real estate development affects cash use.
- Working-capital movements, particularly receivables and payables, given seasonal cash-flow patterns and customer duty advances.
- The sustainability of margins amid weaker net revenue, higher overhead as a share of net revenue, and elevated effective tax rates.