Expeditors International of Washington, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Expeditors is a non-asset-based global logistics provider offering airfreight, ocean freight and services, customs brokerage, and other supply-chain services. Comparisons are with the corresponding 2020 periods; the filing notes that pandemic effects make year-over-year comparisons unusual.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.609 billion | $2.411 billion | $6.808 billion | $4.255 billion |
| Operating income | $410.6 million | $247.6 million | $796.2 million | $406.7 million |
| Net earnings attributable to shareholders | $316.4 million | $183.9 million | $603.6 million | $306.2 million |
| Diluted earnings per share | $1.84 | $1.09 | $3.52 | $1.80 |
| Cash from operating activities | $30.5 million | $186.7 million | $386.2 million | $351.7 million |
- Q2 revenue rose 50%, operating income 66%, shareholder net earnings 72%, and diluted EPS 69%. Six-month growth was 60%, 96%, 97%, and 96%, respectively.
- Approximate operating margin was 11.4% in Q2 versus 10.3% in 2020, and 11.7% for the first half versus 9.6%. Approximate net margin attributable to shareholders was 8.8% versus 7.6% in Q2 and 8.9% versus 7.2% for the first half.
- Q2 revenue by service: airfreight $1.524 billion (+20%); ocean freight and services $1.099 billion (+124%); customs brokerage and other services $987.0 million (+51%). Corresponding six-month growth was 48%, 109%, and 41%.
- Operating expenses rose with activity and rates. Q2 total operating expenses increased 48%; salaries and related costs increased 22%, reflecting higher commissions and bonuses as profitability grew.
Liquidity, cash flow, and capital
- At June 30, cash and cash equivalents were $1.674 billion, current assets $4.985 billion, and current liabilities $2.485 billion. Working capital was $2.5 billion.
- Q2 operating cash flow fell to $30.5 million from $186.7 million, primarily because of higher receivables from revenue growth and slower customer collections. First-half operating cash flow increased to $386.2 million from $351.7 million.
- Cash used in investing activities was $14.8 million for the first half, principally capital expenditures. Management estimated 2021 capital expenditures of approximately $45 million.
- First-half financing activities used $219.6 million, including $148.5 million of share repurchases and $98.4 million of dividends. The semiannual dividend was $0.58 per share.
- The company reported no long-term debt; obligations included operating lease liabilities of $450.5 million in total. Management said cash and operating cash flows should meet liquidity needs for at least the next 12 months and the foreseeable future.
Material changes and operating trends
- Management attributed strong results to robust shipment volumes and unusually high average selling and carrier-buying rates amid demand-capacity imbalances and supply-chain disruption. These conditions followed pandemic-related closures and activity changes in 2020.
- In Q2, airfreight tonnage rose 37%, while average sell and buy rates declined 14% and 12%, respectively, from elevated 2020 levels. For the first half, tonnage rose 33% and average sell and buy rates rose 12% and 13%.
- Ocean consolidation benefited from higher volumes and rates: Q2 containers shipped increased 34%, with average sell and buy rates up 109% and 108%. First-half container volume rose 32%, and rates increased 96% and 95%.
- Higher demand and port congestion also supported customs brokerage and other services, including demand associated in part with Brexit and increased charges on import services.
- Q2 operating cash flow was especially affected by working capital: accounts receivable increased $410.8 million and deferred contract costs increased $150.4 million in the quarter.
Outlook, risks, and unusual items
- Management expected capacity constraints and disruptive conditions to continue at least through the remainder of 2021; ocean demand was expected to remain strong through at least year-end. Port congestion, labor and equipment shortages, reduced passenger flight schedules, and tight carrier capacity limited the ability to move additional freight.
- The company cautioned that historically high rates and current operating conditions were not expected to be sustained long-term and that pricing volatility could reduce operating income. It could not predict the effects of future disruptions on operations or results.
- Principal risks include carrier capacity and financial stability, customer dissatisfaction with elevated rates or delays, fuel-price pass-through, trade policy and tariffs, competition, foreign exchange, and changes in consumer demand and global trade. Management also cited potential employee retention challenges as pandemic restrictions ease and employees return to offices.
- Foreign-exchange sensitivity analysis estimated that, all else equal, a 10% average weakening of the U.S. dollar over the first half would have increased operating income by about $53 million; a 10% strengthening would have reduced it by about $43 million. The company had no foreign-currency derivatives outstanding.
- The effective tax rate was 23.7% for Q2 and 24.9% for the first half, compared with 26.6% in both 2020 periods. Lower rates reflected, among other factors, share-based compensation deductions and a favorable adjustment related to deferred taxes on unremitted foreign earnings. Tax contingencies may increase, and audits or settlements could change recorded amounts.
- The company corrected immaterial historical errors that had overstated revenue and directly related transportation expense by equal amounts, principally in North Asia. The correction had no effect on operating income, net earnings, EPS, cash flows, or balance sheets; affected historical comparisons were revised.
- Ordinary-course legal matters were not expected by management to have a significant effect; accrued amounts were not significant, and possible additional losses could not be estimated. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether high freight rates, capacity constraints, and pandemic-related supply-chain disruption persisted or reversed after the filing date, and how that affected margins and earnings.
- Whether receivables and deferred contract costs converted to cash as expected, given the sharp Q2 operating cash-flow decline.
- Whether volume growth and pricing trends in air, ocean, and customs services continued, especially in North Asia and other constrained markets.
- Progress toward the approximately $45 million 2021 capital-expenditure estimate and any changes in dividends, repurchases, or liquidity.
- Developments in tax examinations and contingencies, and any future disclosures concerning the corrected historical revenue and expense presentation.