Expeditors International of Washington, Inc. — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. Expeditors is a non-asset-based global logistics provider, offering air and ocean freight, customs brokerage and related services.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $1,460.8 million | $1,201.1 million | +21.6% |
| Net revenue (revenue less transportation costs) | $453.9 million | $361.8 million | +25.5% |
| Operating income | $147.2 million | $100.5 million | +46.4% |
| Operating income as % of net revenue | 32.4% | 27.8% | +4.6 percentage points |
| Net earnings attributable to shareholders | $91.2 million | $61.2 million | +48.9% |
| Diluted EPS | $0.42 | $0.28 | +50.0% |
| Operating cash flow | $177.8 million | $127.1 million | +$50.7 million |
Airfreight, ocean freight and ocean services, and customs brokerage and other services revenue were $700.9 million, $440.1 million and $319.8 million, respectively. Net revenue grew 34% in airfreight, 25% in ocean services and 18% in customs brokerage and other services. Airfreight tonnage rose 16%; ocean freight consolidation volume rose 7%, while net revenue per container increased 24%.
Liquidity and capital
- Cash and cash equivalents were $1,238.5 million at March 31, 2011; cash, cash equivalents and short-term investments totaled $1,239.1 million.
- Working capital was $1,366 million. Current assets were $2,280.8 million and current liabilities were $915.0 million.
- No long-term debt or short-term borrowings were outstanding. International credit lines totaled $22 million; $94 million of standby letters of credit and guarantees were outstanding.
- Capital expenditures were $21.1 million versus $7.6 million in Q1 2010. Management estimated full-year 2011 capital expenditures of $117 million, including real estate development.
- Cash increased $154.0 million during the quarter. Financing activities used $9.5 million, including $19.6 million of share repurchases. The board declared a subsequent semi-annual dividend of $0.25 per share, payable June 15, 2011.
Material changes and management commentary
Management attributed stronger freight activity primarily to global economic improvement and market-share gains. Limited spot-market buying opportunities, particularly in Asia, supported higher yields. Management cautioned that higher fuel costs, carrier capacity management and price volatility could pressure unit profitability as the company negotiates rate changes with customers.
Salaries and related costs rose 19%, mainly from higher performance bonuses and increased staffing; they declined to 52.4% of net revenue from 55.2%, reflecting improved staff utilization. Other overhead increased 12%, including higher business taxes and activity-related costs. The effective income tax rate was approximately 39.4%, down from 40.4%.
Management said cash and operating cash flow should be sufficient for foreseeable capital and liquidity needs. It gave no earnings or revenue forecast. The company noted that Q1 has historically been its weakest quarter and that seasonal peak activity can increase receivables and consume cash.
Risks, contingencies and unusual items
- Ongoing antitrust matters include a U.S. Department of Justice investigation, a U.S. class action seeking unspecified damages and injunctive relief, a European Commission proceeding, and a Brazilian Ministry of Justice proceeding. The company disputes the allegations and is defending them; it cannot estimate any potential loss. Adverse outcomes could materially affect financial results and cash flows. Cumulative legal and associated costs since 2007 were approximately $15 million.
- Foreign exchange, international trade and regulatory changes, carrier financial health and capacity, competitive pricing, customer demand, and seasonal shipping patterns are identified risks. Net foreign currency losses were $1 million in Q1 2011 versus $2 million in Q1 2010; no foreign currency derivatives were outstanding.
- A hypothetical 10% weakening of the U.S. dollar would have increased Q1 operating income by approximately $10 million; a 10% strengthening would have reduced it by approximately $8 million, all else equal.
- The company adopted updated multiple-deliverable revenue accounting guidance in Q1 2011; adoption had no material impact. Disclosure controls were reported effective, with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether freight volume and yield gains persist, particularly as fuel costs, carrier capacity and customer pricing negotiations change.
- Developments and potential exposure in the antitrust investigations and litigation; the filing provides no estimable loss range.
- Execution of the estimated $117 million 2011 capital program and its effect on cash generation.
- Seasonal working-capital requirements, including customer receivables and customs-related pass-through advances.
- Exposure to currency movements and the location and accessibility of cash: $629 million was held by non-U.S. subsidiaries, including $72 million in U.S. banks.