Expeditors International of Washington, Inc. — Q3 2016 Form 10-Q
Business context and period: Global, non-asset-based logistics provider. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Unless noted, amounts are U.S. dollars in millions. “Net revenues” is the company’s non-GAAP measure of revenue less directly related service expenses.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1,562.4 | $1,651.3 | $4,456.0 | $5,020.4 |
| Net revenues | $545.3 | $570.0 | $1,615.4 | $1,651.6 |
| Operating income | $167.3 | $191.9 | $498.0 | $543.5 |
| Net earnings attributable to shareholders | $107.6 | $118.3 | $320.2 | $342.8 |
| Diluted earnings per share | $0.59 | $0.62 | $1.75 | $1.79 |
| Operating income / net revenues | 30.7% | 33.7% | 30.8% | 32.9% |
| Operating cash flow | $115.7 | $132.7 | $456.7 | $448.8 |
For Q3, revenue declined 5.4%, net revenues 4.3%, operating income 12.8%, and shareholder earnings 9.1% year over year. For the nine months, the respective declines were 11.2%, 2.2%, 8.4%, and 6.6%. The nine-month diluted EPS decline was 2.2%.
At September 30, cash and cash equivalents were $1,042.7 million, working capital was approximately $1,308 million, and the company reported no long-term debt. Current assets were $2,235.7 million and current liabilities $927.6 million. Nine-month capital expenditures were $40.0 million; operating cash flow less capital expenditures was approximately $416.7 million. The company repurchased $268.1 million of shares and paid $73.0 million in dividends during the nine months. The board declared a further $0.40-per-share semiannual dividend after quarter-end.
Material changes and operating drivers
- Airfreight: Q3 net revenues fell 9%, chiefly as net revenue per kilo declined 17%, partly offset by 7% tonnage growth. For the first nine months, net revenues fell 8%; competitive pricing and carrier overcapacity weighed on yields.
- Ocean freight and services: Q3 net revenues declined 6%, while container volume rose 3%; nine-month net revenues were approximately flat. Lower sell and buy rates reflected competitive conditions and carrier overcapacity. Management reported a late-Q3 spike in buy rates following Hanjin’s August 31 bankruptcy filing.
- Customs brokerage and other services: Net revenues increased 1% in Q3 and 2% year to date, primarily from road freight volume growth.
- Q3 total revenue fell more sharply than net revenues as transportation-related revenue and costs decreased. Q3 operating margin on net revenues declined to 30.7% from 33.7%; salaries and related costs rose to 53% of net revenues from 52%.
- Nine-month cash from operations increased $7.9 million despite lower earnings, mainly due to working-capital changes. Q3 operating cash flow decreased $17.0 million, primarily due to lower earnings and working capital.
Outlook, risks, and other matters
- No formal earnings or revenue guidance is provided. Management estimated 2016 capital expenditures at approximately $60 million, including routine spending and additional real-estate development. It expects cash and operating cash flows to meet liquidity needs for at least the next 12 months and thereafter for the foreseeable future.
- Management cited uncertain global trade growth, intense competition, customer pressure on pricing and terms, carrier overcapacity, and ocean-carrier liquidity challenges. It expected pricing volatility to continue; realignment of carrier alliances and Hanjin-related disruption could affect rates, capacity, revenues, and yields. Seasonal peak activity can increase receivables and consume cash.
- Foreign exchange is a risk: a hypothetical 10% weakening of the U.S. dollar over the nine-month period would have raised operating income by about $35 million; a 10% strengthening would have reduced it by about $29 million. The company had no foreign currency derivatives outstanding.
- Standby letters of credit and guarantees totaled $72 million. Contractual cash obligations were $377.7 million, including $196.2 million of operating leases and $148.4 million of unconditional purchase obligations. In October 2016, the company also entered a $51 million agreement to construct a building in Europe.
- Ordinary-course legal matters were not expected by management to have a significant effect; accrued amounts were not significant, and potential additional losses could not be estimated. Management reported effective disclosure controls and no material change in internal controls, while noting a multiyear worldwide accounting-system implementation.
- New accounting standards may affect presentation: lease accounting adoption is expected to put lease assets and liabilities on the balance sheet; the company was evaluating the full impact. The revenue standard was not expected to materially change revenue amount or timing, according to management’s current assessment.
Important facts for investors to verify
- Whether air and ocean yields stabilize or continue to decline, and how volume growth translates into net revenues and operating margins.
- The continuing effects of Hanjin’s bankruptcy and carrier capacity, liquidity, and alliance changes on ocean rates and service availability.
- Working-capital and seasonal cash-flow trends, particularly receivables and customer collections during peak shipping periods.
- Execution and cash requirements for the estimated $60 million 2016 capital program and the additional $51 million European building commitment.
- Share repurchases, dividends, and the adoption impacts of lease and other new accounting standards.