Expeditors International of Washington, Inc. — Q1 2017 Form 10-Q
Business and period: Global, non-asset-based logistics provider offering air and ocean freight, customs brokerage, and other services. Results cover the three months ended March 31, 2017, compared with Q1 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,545.1 | $1,418.5 | +8.9% |
| Net revenue (non-GAAP) | $527.6 | $517.1 | +2.0% |
| Operating income | $146.1 | $151.8 | -3.8% |
| Net earnings attributable to shareholders | $93.3 | $96.6 | -3.4% |
| Diluted EPS | $0.51 | $0.53 | -3.8% |
| Operating cash flow | $195.7 | $236.0 | -17.1% |
Operating margin on net revenue was approximately 27.7%, down from 29.4%; shareholder net earnings were approximately 17.7% of net revenue versus 18.7%. Management uses net revenue—total revenue less directly related service expenses—as a key operating measure.
- Service mix: Air net revenue was $172.1 million, essentially flat; ocean net revenue was $127.7 million, down 3%; customs brokerage and other services net revenue was $227.8 million, up 7%.
- Balance sheet and liquidity: Cash and cash equivalents were $1,156.0 million at March 31, versus $974.4 million at year-end. Working capital was $1,475 million; current assets were $2,401.8 million and current liabilities $926.8 million. The company reported no long-term debt.
- Cash uses and equity: Capital expenditures were $12.8 million. Stock repurchases used $53.9 million, while stock issuance proceeds were $45.4 million. Cash increased by $181.6 million during the quarter.
Material changes and management commentary
- Total revenue growth reflected higher service volumes and, in ocean, higher average sell rates. Directly related service expenses grew faster than revenue in air and ocean, limiting net revenue growth.
- Air tonnage increased 16%, but net revenue per kilo declined 17%, leaving air net revenue flat. Ocean container volume rose 7%, while consolidation net revenue per container fell 17%; ocean net revenue decreased 3% as buy rates and service expenses increased.
- Customs brokerage and other services benefited from higher customs and road-freight volumes, particularly in North America. Salaries and related costs rose 3%; other overhead expenses increased 9%, including higher rent, claims, travel, and technology costs.
- Management cited competitive pricing pressure, volatile carrier capacity and rates, ocean-carrier liquidity challenges, uncertain global trade and economic conditions, fuel costs, currency movements, and political or regulatory changes as risks. The company noted that Q1 has historically been its weakest quarter and that seasonality may continue.
- Management said existing cash and operating cash flows should be sufficient for liquidity needs for at least the next 12 months and foreseeable future. Estimated 2017 capital expenditures were approximately $110 million, including real estate development and a building project in Europe.
Outlook, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management expects competitive and operating pressures and ocean pricing volatility to continue; it also noted that carrier capacity and demand imbalances may affect airfreight volumes and margins.
- Assets held for sale include Miami land and buildings with an $80 million net book value. A sale agreement was entered into in May 2017; closing was expected in Q2 or Q3 2017 at a price, after selling costs, above net book value.
- After quarter-end, shareholders approved a new incentive plan with 2.5 million shares available; restricted stock units and CEO performance stock units were awarded in May. The Board also declared a $0.42-per-share semiannual dividend payable June 15, 2017.
- Ordinary-course legal claims and investigations were not expected by management to have a significant effect; accrued amounts were not significant. The company could not estimate additional reasonably possible losses.
- Revenue-recognition guidance was scheduled for adoption in 2018; the assessment was incomplete, though management did not then expect a material impact. Lease guidance was scheduled for 2019; future minimum lease payments under noncancelable leases were approximately $210 million.
Important facts for investors to verify
- Whether service-volume growth can translate into stronger net revenue and operating income amid declining yields and carrier-cost volatility.
- Whether the planned $110 million of 2017 capital expenditures, including real estate projects, and the Miami property sale proceed on the expected terms and timing.
- How working-capital movements, seasonal receivables, and customer collections affect operating cash flow in subsequent quarters.
- The eventual effects of revenue-recognition and lease-accounting adoption, including any changes to reported revenue presentation and balance-sheet liabilities.
- Exposure to foreign exchange, carrier financial distress, trade-policy changes, and ordinary-course legal contingencies; management reported approximately $5 million of net foreign-currency losses in Q1 2017.