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, 2018, compared with the corresponding 2017 periods. Unless otherwise indicated, amounts below are in U.S. dollars and rounded to millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,957.6 | $1,672.3 | $3,811.8 | $3,217.4 |
| Net revenue (non-GAAP) | $642.5 | $563.6 | $1,278.4 | $1,091.2 |
| Operating income | $183.6 | $168.2 | $376.4 | $314.4 |
| Net earnings attributable to shareholders | $140.6 | $108.9 | $276.3 | $202.1 |
| Diluted EPS | $0.79 | $0.60 | $1.54 | $1.11 |
| Operating income / net revenue | 28.6% | 29.8% | 29.4% | 28.8% |
| Effective income tax rate | 25.8% | 37.4% | 28.5% | 37.4% |
- Q2 revenue rose 17.1%, net revenue 14.0%, operating income 9.1%, shareholder earnings 29.2%, and diluted EPS 31.7% year over year. For the first half, the respective increases were 18.5%, 17.1%, 19.7%, 36.7%, and 38.7%.
- Airfreight net revenue increased 21% in Q2 and 24% year to date, with higher tonnage and net revenue per kilo. Ocean net revenue rose 2% in Q2 and 6% year to date; ocean consolidation net revenue fell 5% in Q2, primarily due to lower net revenue per container. Customs brokerage and other net revenue increased 16% in Q2 and 19% year to date.
- Operating cash flow was $384.0 million for the first half, versus $276.9 million a year earlier; management attributed the increase primarily to higher earnings and improved working capital. Capital expenditures were $25.9 million, versus $33.1 million.
- At June 30, cash and cash equivalents were $1,020.9 million, working capital was $1,324 million, and the company had no long-term debt. Cash declined $30.2 million from year-end 2017. Financing cash use included $407.9 million of share repurchases and $79.2 million of dividends.
- Total assets were $3,132.8 million and total equity was $1,892.6 million at June 30. The company declared and paid $0.45 per share in dividends during the first half.
Material changes and notable items
- Effective January 1, 2018, the company adopted Topic 606 using the modified retrospective method. Adoption reduced opening retained earnings by $22.4 million and recorded deferred contract costs of $135 million and contract liabilities of $165 million. The company reported that adoption did not materially change its revenue-recognition policy.
- For 2018, certain warehouse and distribution revenues shifted from net to gross presentation, adding approximately $50 million to both revenue and operating expenses in each quarter. Prior-year comparatives were not recast, so reported revenue growth is not fully comparable; the filing presents net revenue as a supplemental operating measure.
- Q2 other overhead expenses increased 41%, partly because the second quarter of 2017 included an $8 million recovery of legal costs and a favorable $6 million indirect-tax contingency resolution. Higher space rental and technology-related fees also contributed.
- The lower 2018 effective tax rate principally reflected the reduced U.S. federal corporate tax rate and share-based compensation deductions, partly offset by nondeductible expenses and $2.0 million of estimated BEAT tax expense in Q2. Tax Act amounts remained provisional; further adjustments could be material.
- Foreign currency translation reduced first-half comprehensive income by $17.2 million. The company reported no foreign-currency derivatives outstanding at June 30.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management estimated 2018 capital expenditures of approximately $70 million and stated that cash and operating cash flows should meet liquidity needs for at least the next 12 months and the foreseeable future.
- Management expects ongoing pricing volatility in ocean freight as carriers adjust capacity, alliances, and rates; changing fuel prices and trade policies may affect carrier costs and the company’s ability to pass increases to customers. Airfreight capacity-demand imbalances and shifting customer demand may also increase volatility.
- Key exposures include changes in international trade, tariffs and government regulations; foreign exchange; carrier capacity, stability and liquidity; intense competition; seasonality; and customers’ ability to pay. A hypothetical 10% weakening of the U.S. dollar would have increased first-half operating income by approximately $27 million, while a 10% strengthening would have reduced it by approximately $22 million, all else equal.
- Standby letters of credit and guarantees totaled $65 million. Ordinary-course legal matters were not expected by management to materially affect operations, cash flows, or financial position; accrued amounts were not significant, and possible additional losses could not be estimated.
- The company expects to adopt the lease accounting standard on January 1, 2019. Future minimum operating lease payments were approximately $250 million at June 30, 2018; adoption is expected to affect the balance sheet.
Important facts for investors to verify
- Separate underlying operating growth from the approximately $50 million quarterly gross-presentation increase in both revenue and expense; review net revenue and service-level volume and yield trends.
- Assess whether airfreight yield gains and ocean freight margins can persist amid carrier capacity, fuel-cost, and pricing volatility.
- Track cash generation against the planned $70 million of 2018 capital expenditures, substantial share repurchases, and dividends.
- Monitor finalization of provisional Tax Act accounting, including BEAT and transition-tax amounts, and the expected balance-sheet effect of lease-standard adoption.
- Review trade-policy developments, currency exposure, carrier financial health, and the timing of seasonal shipping activity.