Expeditors International of Washington, Inc. — Q1 2015 Form 10-Q
Business context and period: Global, non-asset-based logistics provider; quarter ended March 31, 2015, compared with Q1 2014. Amounts below are in millions unless stated otherwise. The company reorganized Asia Pacific into North Asia and South Asia; prior-period segment information was recast.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1,677.5 | $1,491.6 | +12.5% |
| Net revenue (non-GAAP) | $529.5 | $464.6 | +14.0% |
| Operating income | $168.9 | $135.2 | +24.9% |
| Net earnings attributable to shareholders | $106.7 | $83.8 | +27.3% |
| Diluted EPS | $0.55 | $0.42 | +31.0% |
| Operating cash flow | $134.4 | $173.9 | -22.7% |
Operating income was 31.9% of net revenue, versus 29.1% a year earlier; net earnings attributable to shareholders were 20.2% of net revenue, versus 18.0%. The effective tax rate declined to 37.5% from 38.8%. Net revenue is a company-defined non-GAAP measure: total revenue less direct air, ocean, and customs-service expenses.
Airfreight net revenue increased 18%, reflecting 13% higher tonnage and improved net revenue per kilo. Ocean net revenue rose 18%, with container volume up 12%; ocean consolidation net revenue increased 34%, including a 20% increase in net revenue per container. Customs brokerage and other-services net revenue increased 8%. Higher activity and margins were partly offset by competitive pricing and higher overhead costs.
Balance sheet, cash flow, and capital
- Cash and cash equivalents were $1,033.1 at March 31, 2015, up from $927.1 at year-end; short-term investments were $0.1. Working capital was approximately $1,373.
- Current assets were $2,352.2 and current liabilities $979.2. The company reported no long-term debt.
- Operating cash flow was $134.4; management attributed the year-over-year decline primarily to working-capital changes, including increased receivables, partly offset by higher earnings. Investing activities provided $31.0, including $40.3 in net proceeds from short-term investments; capital expenditures were $9.4. Financing activities used $41.7, including $77.4 of share repurchases.
- Shareholders’ equity was $1,924.9. Foreign-currency translation produced a $19.6 comprehensive loss for the quarter. Cash held by non-U.S. subsidiaries was $597, including $56 held in U.S. banks.
Outlook, risks, and notable items
- Management estimated 2015 capital expenditures at $85, including routine spending and additional real estate development. It said cash and operating cash flows should be sufficient for liquidity needs for at least 12 months and thereafter for the foreseeable future. No earnings or revenue guidance was provided.
- Management described the first quarter as seasonally the weakest. It expects intense industry competition and continued customer pressure on pricing and terms. Airfreight remains exposed to carrier overcapacity and shipment volatility; ocean performance depends in part on carrier capacity and pricing.
- West Coast port disruptions shifted some shipments from ocean to airfreight. The company reported successful rerouting of ocean shipments through alternative ports. Lower oil prices had not materially affected buy or sell rates to date; customers were seeking lower rates, while some carriers had hedged fuel costs through 2015. Management did not expect a significant adverse effect on net revenue from lower oil prices, but noted uncertainty.
- Foreign-currency losses were approximately $4 for the quarter, and no foreign-currency derivatives were outstanding. Management’s sensitivity analysis estimated that a hypothetical 10% average weakening of the U.S. dollar would raise operating income by about $12, while a 10% strengthening would reduce it by about $10.
- Standby letters of credit and guarantees totaled $71. The company said related underlying obligations were recorded by subsidiaries. Ordinary-course legal matters were not expected by management to have a significant effect; recorded accruals were not significant, and additional possible losses could not be estimated.
- The board authorized discretionary repurchases to reduce outstanding shares to 188 million; the company repurchased 1.6 million shares in the quarter across its plans. After quarter-end, the board declared a $0.36-per-share semiannual dividend payable June 15, 2015.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. A worldwide accounting-system implementation is in progress; relevant controls are tested before new functions are implemented.
Important facts for investors to verify
- Whether revenue and net-revenue growth, particularly ocean yields and airfreight margins, persisted beyond the quarter and amid competitive pricing.
- Whether working-capital needs and seasonal receivables growth affect operating cash generation through peak shipping periods.
- Progress and spending against the $85 million capital-expenditure estimate, including real estate development.
- Effects of carrier capacity, port conditions, fuel pricing, exchange rates, and customer pricing demands on margins and volumes.
- Execution and control effectiveness during the multiyear accounting-system transition, and developments in legal matters or contingent guarantees.