Expeditors International of Washington, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. The company provides global freight forwarding, customs brokerage and logistics services, generally arranging transportation through third-party carriers rather than owning aircraft or ships. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $895.4 | $1,454.3 | $1,808.0 | $2,761.6 |
| Net revenue | $330.0 | $397.3 | $666.6 | $771.7 |
| Operating income | $86.9 | $113.0 | $178.4 | $218.5 |
| Net earnings attributable to shareholders | $54.1 | $71.2 | $113.3 | $137.7 |
| Diluted EPS | $0.25 | $0.32 | $0.52 | $0.62 |
| Operating cash flow | $85.1 | $36.0 | $257.4 | $214.7 |
- Q2 total revenue fell 38.4% year over year, while net revenue fell 16.9%, operating income 23.1%, and shareholder earnings 24.1%. For the first half, those declines were 34.5%, 13.6%, 18.4%, and 17.7%, respectively.
- Net revenue is revenue less transportation expenses and is management’s preferred measure of the company’s service contribution. Operating income as a share of net revenue was 26.3% in Q2 versus 28.4% in Q2 2008, and 26.8% for the first half versus 28.3%.
- Q2 net revenue declined across airfreight (19%), ocean freight and services (17%), and customs brokerage and other services (15%). Airfreight tonnage fell 26% in Q2, partly offset by a 20% increase in net revenue per kilo. Ocean consolidation volume fell 23%.
- Cash and cash equivalents were $916.0 at June 30, 2009, up from $741.0 at year-end 2008. Working capital was $961.2; current assets were $1,534.9 and current liabilities $573.7. The company reported no long-term debt and no borrowings on its credit lines.
- Q2 operating cash flow rose year over year, primarily due to timing of receivables and payables, despite lower earnings. First-half operating cash flow was also higher, mainly reflecting working-capital movements.
- Capital expenditures were $15.8 for the first half, including a $7.3 prepayment on a long-term land lease. Management estimated 2009 capital expenditures of $60.
Changes, outlook and risks
- Management attributed lower freight volumes to the global economic downturn, which began affecting volumes in the second half of 2008. It said Q2 total revenue and net revenue were both below Q1 levels, an unprecedented result in the company’s history, and could not predict the downturn’s continued impact or the effectiveness of government stimulus.
- Pricing remained pressured by customers and service providers. Management described lower average base salaries and bonuses, and cost controls including reduced travel and entertainment. Salaries and related costs fell in dollars but increased as a share of net revenue, reflecting fixed-cost pressure and the decision to retain personnel.
- A roughly $4 million first-quarter stock-option forfeiture true-up credit reduced first-half stock-compensation expense; the resulting net impact on salaries and related costs was about $3 million after bonus effects.
- The company faced ongoing U.S. Department of Justice and European Commission investigations into alleged anti-competitive conduct, plus a U.S. antitrust class action. The company denied the allegations and said it would defend itself. It had incurred about $14 million in cumulative legal and related costs by June 30; it could not estimate potential losses. Fines or penalties, if imposed, could materially affect financial position, results and cash flows.
- Other risks include global trade and economic conditions, competition, customer demand and credit quality, foreign exchange movements, regulation, and reliance on carrier capacity and relationships. Management said liquidity and financing resources should be sufficient for foreseeable needs, including contingent obligations.
- Cash and cash equivalents held by non-U.S. subsidiaries totaled $501 million, including $64 million held in U.S. banks; some foreign funds may be subject to exchange controls. Standby letters of credit and guarantees totaled $79 million, supported by available credit facilities.
Important facts for investors to verify
- Whether freight volumes and pricing stabilize, especially airfreight tonnage and ocean container volumes, and whether the sequential Q2 decline persists.
- How net revenue and operating margins respond to continued volume weakness, compensation costs and pricing pressure.
- Developments in the DOJ and EC investigations and antitrust litigation, including potential legal expense, fines or other liabilities not estimable in this filing.
- Whether the $60 million 2009 capital expenditure estimate and substantial cash balances remain consistent with operating and liquidity needs.
- The sustainability of operating cash flow improvement, given the filing’s emphasis on working-capital timing and seasonal cash-flow patterns.