Expeditors International of Washington, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Expeditors is a non-asset-based global logistics provider offering air and ocean freight, customs brokerage, and related services. The filing compares results with Q1 2017 unless stated otherwise.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $1.854 billion | $1.545 billion | +20% |
| Net revenues | $635.8 million | $527.6 million | +20% |
| Operating income | $192.8 million | $146.1 million | +32% |
| Net earnings attributable to shareholders | $135.7 million | $93.3 million | +46% |
| Diluted EPS | $0.76 | $0.51 | +49% |
| Operating cash flow | $235.5 million | $195.7 million | +$39.8 million |
Operating income was 30% of net revenues, versus 28% a year earlier; net earnings were 21% of net revenues, versus 18%. The effective tax rate declined to 31.1% from 37.3%, mainly reflecting the lower U.S. federal tax rate under the 2017 Tax Act and share-based compensation deductions.
Cash and cash equivalents were $1.133 billion at quarter-end, compared with $1.051 billion at December 31, 2017. Working capital was $1.439 billion. The company reported no long-term debt. Capital expenditures were $13.8 million; management estimated full-year 2018 capital expenditures of approximately $75 million. Cash used for share repurchases was $172.4 million, and 2.66 million shares were repurchased during the quarter.
Business changes and comparability
- Airfreight net revenues rose 26%, mainly from higher net revenue per kilo and 5% tonnage growth. Ocean net revenues increased 11%, with container volume up 5%. Customs brokerage and other net revenues rose 21%, supported by higher customs, road freight, and distribution volumes.
- Reported customs brokerage and other revenues and expenses each include approximately $50 million from changing certain warehouse and distribution revenue presentation from net to gross under Topic 606. This affects comparability with 2017; prior-year figures were not restated.
- Topic 606 adoption also resulted in a $22 million reduction to opening retained earnings and initial recognition of deferred contract costs and contract liabilities. The company said adoption did not materially change its revenue recognition policy.
- Higher salaries and related costs reflected increased staffing, base pay, benefits, and incentive compensation. Other overhead costs increased, in part from additional space and technology fees.
Outlook, risks, and other notable items
- No formal earnings or revenue guidance was provided. Management expects ongoing investment in people, processes, and technology and believes cash and operating cash flow will meet liquidity needs for at least the next 12 months and the foreseeable future.
- Management described global trade and economic conditions as improved but uncertain. Risks include intense competition, freight-rate and carrier-capacity volatility, fuel prices, trade and regulatory changes, currency movements, and customer demand fluctuations. Management noted that seasonal patterns may continue but are not assured.
- The company recorded an additional provisional $1.8 million tax expense related to the Tax Act transition tax in Q1. Further IRS guidance and analysis could require additional tax adjustments; final amounts could differ materially from provisional estimates.
- Standby letters of credit and guarantees totaled $73 million. Ordinary-course legal matters were not expected by management to significantly affect operations, cash flows, or financial position; potential additional losses could not be estimated.
- A semi-annual dividend of $0.45 per share was declared May 8, 2018, payable June 15 to shareholders of record June 1. The company also disclosed approximately $253 million of future minimum payments under noncancelable leases; the new lease accounting standard was expected to take effect in 2019.
Important facts for investors to verify
- Assess underlying growth and margins using net revenues, taking into account the Topic 606 gross-presentation change and the approximately $50 million revenue-and-expense increase.
- Monitor freight volumes, net revenue per shipment, carrier capacity, and the ability to pass higher buy rates on to customers.
- Track final Tax Act calculations and any subsequent discrete tax adjustments.
- Review execution of planned technology and lease-accounting changes, as well as the expected $75 million 2018 capital expenditure program.
- Consider the scale of share repurchases, the dividend, and the company’s substantial cash position alongside future working-capital needs and carrier-related contingencies.