Business context and reporting period
Expeditors International of Washington, Inc. is a non-asset-based global logistics provider. This Form 10-Q reports the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,035.6 | $1,957.6 | $4,055.6 | $3,811.8 |
| Net revenue | $661.7 | $642.5 | $1,315.8 | $1,278.4 |
| Operating income | $192.2 | $183.6 | $379.8 | $376.4 |
| Net earnings attributable to shareholders | $153.1 | $140.6 | $292.8 | $276.3 |
| Diluted EPS | $0.88 | $0.79 | $1.67 | $1.54 |
| Operating margin on net revenue | 29% | 29% | 29% | 29% |
Q2 revenue rose 4.0%, net revenue 3.0%, operating income 4.7%, shareholder earnings 8.9% and diluted EPS 11.4%. For the first half, revenue increased 6.4%, net revenue 2.9%, operating income 0.9%, shareholder earnings 6.0% and diluted EPS 8.4%. Net revenue is a company-defined non-GAAP measure: revenue less directly related transportation and service costs.
Q2 net revenue by service: airfreight $198.9 million, down 5%; ocean $153.5 million, up 6%; customs brokerage and other services $309.2 million, up 7%. Airfreight weakness reflected lower tonnage and net revenue per kilo; customs and other services growth reflected higher brokerage, road freight and distribution volumes.
Six-month operating cash flow was $445.2 million, versus $384.0 million; investing cash outflow was $21.1 million, including $22.4 million of capital expenditures. Cash and cash equivalents were $1,082.7 million at June 30, compared with $923.7 million at year-end 2018. Working capital was $1,433 million. The company reported no long-term debt; operating lease liabilities totaled $377.0 million ($61.3 million current and $315.8 million noncurrent). Management said cash and operating cash flow should cover liquidity needs for at least 12 months and the foreseeable future.
Material changes, outlook and risks
- Airfreight revenue fell 8% in Q2 as tonnage declined 5% and average sell rates softened. Management cited capacity exceeding demand in some lanes and ongoing trade uncertainty.
- Ocean net revenue grew 6% in Q2, supported by higher container volumes and net revenue per container. Management cautioned that carrier capacity, pricing volatility and 2020 marine-fuel sulfur rules could raise costs and pressure margins.
- Customs brokerage and other services revenue rose 20% in Q2, while directly related expenses rose 31%. Some of the reported revenue and expense increase reflects gross-versus-net presentation changes, with no effect on net revenue or operating income.
- Effective tax rates declined to 23.6% for Q2 and 25.9% for the first half, from 25.8% and 28.5%, respectively. 2019 benefits included foreign tax credits, FDII deductions and a state tax refund; 2018 included BEAT and transition-tax items.
- Management estimated 2019 capital expenditures at approximately $50 million, including technology investment. No earnings or revenue guidance was provided.
- Risks highlighted include U.S.-China tariffs and trade negotiations, Brexit uncertainty, global economic and freight-demand changes, fuel and carrier-rate volatility, carrier financial stability, foreign exchange, and competitive pricing pressure. The company reported $69 million of contingent standby letters of credit and guarantees; management considered ordinary-course legal matters not significant, but could not estimate additional possible losses.
- Adoption of lease accounting on January 1, 2019 added $343 million of right-of-use assets and $340 million of lease liabilities. This was an accounting presentation change, not new borrowing. Management also noted ongoing development of a worldwide accounting system; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether airfreight tonnage and yield stabilize, and whether ocean and customs-services growth persists.
- How trade policy, carrier capacity, fuel costs and the 2020 marine-fuel rules affect margins and volumes.
- Cash-flow sustainability after working-capital swings, share repurchases, dividends and the estimated $50 million of 2019 capital spending.
- The effect of lease obligations, tax developments and accounting-system implementation on future reported results and controls.
- Quarterly seasonality and the company’s exposure to foreign currencies; the filing estimates a hypothetical 10% U.S. dollar weakening would raise six-month operating income by about $25 million, while a 10% strengthening would reduce it by about $20 million.