Expeditors International of Washington, Inc. — Q3 2011 Form 10-Q
Business and period: Global, non-asset-based logistics provider; the report covers the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Amounts below are in U.S. dollars; financial statement amounts are converted to millions for readability.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,606.4M | $1,667.6M | $4,648.6M | $4,385.4M |
| Net revenue | $493.8M | $458.7M | $1,420.3M | $1,239.4M |
| Operating income | $163.8M | $159.6M | $463.3M | $398.7M |
| Net earnings attributable to shareholders | $106.6M | $96.1M | $292.8M | $247.7M |
| Diluted EPS | $0.50 | $0.44 | $1.36 | $1.14 |
| Operating margin on net revenue | 33% | 35% | 33% | 32% |
| Net earnings margin on net revenue | 22% | 21% | 21% | 20% |
| Operating cash flow | $93.3M | $113.0M | $349.2M | $260.7M |
Total revenue includes carrier transportation charges; management considers net revenue (revenue less transportation expenses) a more informative measure of the company’s service economics. Q3 total revenue declined 4%, while net revenue rose 8%. Nine-month total revenue and net revenue increased 6% and 15%, respectively.
At September 30, cash and cash equivalents were $1,260.8M, with another $0.5M in short-term investments. Working capital was $1,447M. The company reported no long-term debt and no outstanding borrowings on its $18M international credit lines. Total assets were $2,883.2M and total equity was $1,962.1M.
Changes and operating trends
- Q3 airfreight net revenue increased 4%, as net revenue per kilo rose 9% but tonnage fell 4%. Ocean net revenue increased 7%, with revenue per container up 7% and FEU volume down 2%. Customs brokerage and other services net revenue increased 12%.
- For the nine months, airfreight net revenue grew 13%, ocean net revenue 16%, and customs brokerage and other services 15%. Management attributed growth to market-share and volume gains and favorable buying opportunities from excess carrier capacity.
- Q3 salaries and related costs increased 10%, primarily from higher incentive compensation, headcount, and average salaries. Operating margin on net revenue declined to 33% from 35%; overhead was 67% of net revenue versus 65%.
- Q3 other income included a substantial year-over-year improvement from foreign exchange gains versus losses in 2010. The nine-month effective tax rate was 39.3%, compared with 39.9%.
- Nine-month operating cash flow rose $88.5M, primarily reflecting higher earnings and improved working capital. Q3 operating cash flow fell $19.7M, as higher earnings were offset by working-capital changes.
Cash deployment, outlook, and risks
- Nine-month capital expenditures were $58.9M; management estimated full-year 2011 capital expenditures at approximately $80M, including additional real estate development.
- Nine-month cash uses included $108.6M for share repurchases and $53.0M for dividends. The board declared a further $0.25-per-share semiannual dividend after quarter-end, payable December 15, 2011.
- Management said cash and operating cash flow should be sufficient for foreseeable capital and liquidity needs. It provided no specific earnings or revenue forecast and said it could not forecast the effect of global economic uncertainty on results.
- Risks include competitive pricing pressure, uncertain freight volumes and consumer demand, seasonality, carrier capacity and financial stability, foreign-exchange exposure, and reliance on secure, sophisticated technology systems. A hypothetical 10% U.S. dollar weakening over the nine-month period would have increased operating income by about $33M; a 10% strengthening would have reduced it by about $27M.
- Antitrust matters remain pending in the U.S., European Union, and Brazil. The company said outcomes and potential losses cannot be estimated; no amounts were accrued. Adverse fines, damages, or injunctions could materially affect results or cash flows. Approximately $16M in legal and associated costs had been incurred since proceedings began in 2007.
- Foreign currency translation reduced nine-month comprehensive income; Q3 translation adjustments were a $24.7M loss. Cash and cash equivalents held by non-U.S. subsidiaries totaled $586M, including $61M held in U.S. banks.
Important facts for investors to verify
- Whether freight volumes and net revenue per kilo/container sustain their trends, particularly given Q3 air and ocean volume declines.
- How compensation and other overhead growth affect operating margins as revenue and net revenue develop.
- Developments in the antitrust investigations and class action, including potential exposure that management cannot currently estimate.
- Actual capital spending versus the approximately $80M estimate and the effects of foreign exchange, working capital, and seasonal cash-flow patterns.
- The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.