Expeditors International of Washington, Inc. — Q3 2014 Form 10-Q
Business and period: Global, non-asset-based logistics provider reporting the three and nine months ended September 30, 2014, compared with the same 2013 periods. Services include air and ocean freight forwarding and consolidation, customs brokerage, and other logistics services. Unless noted otherwise, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Change | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|---|---|---|
| Total revenues | $1,705.1 | $1,538.0 | +10.9% | $4,795.9 | $4,454.4 | +7.7% |
| Net revenues (non-GAAP) | $513.3 | $484.9 | +5.8% | $1,462.6 | $1,404.8 | +4.1% |
| Operating income | $159.1 | $146.3 | +8.8% | $436.8 | $418.4 | +4.4% |
| Net earnings attributable to shareholders | $102.4 | $92.4 | +10.8% | $277.5 | $265.0 | +4.7% |
| Diluted EPS | $0.53 | $0.45 | +17.8% | $1.40 | $1.28 | +9.4% |
| Cash from operating activities | $86.7 | $96.3 | Lower | $305.4 | $345.6 | Lower |
- Net revenues are revenue less directly related service expenses, a company-defined non-GAAP measure. Operating income was 31% of net revenues in Q3 2014 versus 30% in Q3 2013; the comparable nine-month figures were 30% in both periods.
- Q3 revenue by service: airfreight $686.4 million (+9%), ocean freight and ocean services $600.5 million (+14%), and customs brokerage and other services $418.2 million (+9%). For the nine months, the respective growth rates were 6%, 10%, and 8%.
- Q3 net-revenue growth was 5% in airfreight, 8% in ocean services, and 5% in customs brokerage and other services. Airfreight tonnage rose 12%, while net revenue per kilo fell 7%; ocean container volume grew 11%.
Balance sheet, liquidity, and capital allocation
- At September 30, cash and cash equivalents were $990.5 million and short-term investments $40.3 million, totaling $1,030.8 million. Working capital was $1,355 million. The company reported no long-term debt.
- Operating cash flow was down $40.1 million year to date, primarily reflecting changes in receivables, payables, accrued expenses, and income taxes payable. Accounts receivable increased to $1,183.2 million from $1,073.5 million at year-end 2013.
- Year-to-date investing cash use was $67.2 million, including $26.7 million of capital expenditures and a $27.1 million escrow deposit for an expected land acquisition. Management estimated 2014 capital expenditures of approximately $40 million.
- Year-to-date share repurchases used $475.2 million; dividends paid totaled $62.8 million, or $0.32 per share. The board declared a further $0.32-per-share semiannual dividend on November 4, payable December 15, 2014.
- The company had $75 million of contingent standby letters of credit and guarantees, principally supporting foreign subsidiaries’ carrier credit and customs duty/tax obligations. Management said the underlying obligations were recorded by the subsidiaries.
Changes, outlook, and risks
- Earnings and EPS increased, while net-revenue growth was slower than gross-revenue growth. Lower average airfreight sell rates and ocean sell-rate reductions earlier in 2014 constrained yields; customs-service margins were affected by higher import and delivery costs and lower domestic time-definite yields.
- Management cited competitive pricing pressure, unit-margin compression, airfreight overcapacity, volatile buy and sell rates, changing freight volumes, and customer substitution toward deferred air or ocean freight. It expected these conditions to continue. Results are seasonal, with the third and fourth quarters historically stronger, but the company cautioned that patterns may not persist.
- Asia Pacific generated 49% of nine-month revenue and 37% of operating income. Its nine-month operating income was $161.7 million versus $165.6 million a year earlier, despite higher revenue; management attributed pressure in part to lower air and ocean yields.
- The company was conducting a strategic assessment focused on baseline service growth, closer alignment of European and Asia-Pacific/North American operations, expansion of Asian import and selected trade-lane capabilities, and North American market share. No financial guidance was provided.
- Management said cash and operating cash flow should meet capital and liquidity needs for at least the next 12 months and the foreseeable future. Foreign exchange exposure remains: a hypothetical 10% weakening of the U.S. dollar over the first nine months would have increased operating income by about $29 million; a 10% strengthening would have reduced it by about $24 million. No foreign currency derivatives were outstanding.
- Ordinary-course legal matters were not expected by management to significantly affect operations or financial position; accrued amounts were not significant, and potential additional losses could not be estimated. Disclosure controls were deemed effective; the company was developing a new worldwide accounting system that will require control testing. The company was evaluating the impact of the new revenue-recognition standard, ASU 2014-09.
Important facts for investors to verify
- Whether freight volume growth can continue to offset lower yields and ongoing competitive margin pressure, particularly in airfreight and Asia Pacific.
- How working-capital movements and seasonal receivables affect operating cash flow and collections.
- The pace and economics of substantial share repurchases, planned capital spending, and the land acquisition.
- Foreign-exchange, carrier capacity and stability, customer credit, and ordinary-course legal exposures, including the $75 million of guarantees and letters of credit.
- Implementation costs and control implications of the planned accounting-system transition, and the eventual effect of ASU 2014-09.