Expeditors International of Washington, Inc. — Q3 2023 Form 10-Q
Business context and period: Global, non-asset-based logistics provider. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,190 million | $4,362 million | $7,022 million | $13,630 million |
| Operating income | $216 million | $527 million | $741 million | $1,495 million |
| Net earnings attributable to shareholders | $171 million | $414 million | $594 million | $1,138 million |
| Diluted EPS | $1.16 | $2.54 | $3.92 | $6.84 |
| Cash from operating activities | $190 million | $670 million | $895 million | $1,643 million |
Q3 revenue fell 50%, operating income 59%, and shareholder earnings 59% year over year. Nine-month declines were 48%, 50%, and 48%, respectively. Operating margin was approximately 9.9% in Q3 versus 12.1% a year earlier, and 10.5% for the first nine months versus 11.0%. Q3 diluted EPS declined 54% year over year. Higher interest income partly offset lower operating income; the effective tax rate rose to 26.3% for Q3 from 22.6%.
Q3 service revenue changes: airfreight fell 51%, ocean freight and ocean services 67%, and customs brokerage and other services 24%. Management attributed freight declines to lower shipment volumes and sharply lower average buy and sell rates as capacity exceeded demand. In airfreight, Q3 tonnage declined 14%; in ocean freight consolidation, containers shipped declined 15%. Customs brokerage also reflected weaker shipments and lower port-related costs as congestion eased.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $1,639 million at September 30, 2023, down from $2,034 million at December 31, 2022. Working capital was $1,845 million.
- The company reported no long-term debt, but had $50 million borrowed under short-term credit lines. It also had $66 million of contingent exposure under standby letters of credit and guarantees.
- Operating cash flow fell year over year, primarily due to lower earnings and working-capital changes. Capital expenditures were $29 million for the first nine months; anticipated 2023 capital expenditures were approximately $45 million.
- Cash used for share repurchases was $1,199 million in the first nine months, covering 10.5 million shares. Dividends paid were $102 million. A $0.69-per-share semiannual dividend was declared after quarter-end, payable December 15, 2023.
- Fixed lease payment obligations totaled $670 million, including $127 million due within 12 months. Purchase obligations were $117 million. Management stated cash and operating cash flows should meet liquidity needs for at least the next 12 months and foreseeable future.
Changes, outlook and risks
- Management cited soft global demand, elevated customer inventories, normalized supply chains and excess carrier capacity as drivers of lower volumes and rates. It said rate pressure could persist through the remainder of 2023 and into 2024, with continued pricing volatility. The filing provides no specific earnings or revenue guidance.
- Q3 earnings to shareholders declined 13% sequentially from Q2 2023. Compared with Q2, airfreight tonnage increased 5% while revenues declined 4%; ocean consolidation revenue and expense declined 12% and 10%, respectively, mainly from lower rates.
- Inflation, rising interest rates, fuel-price changes, trade policies, geopolitical events, foreign exchange movements, carrier capacity and customer credit quality could adversely affect results. The company identified no material change in its previously disclosed risk factors other than the added economic uncertainty risk.
- Cyberattack-related charges were insignificant in the first three quarters of 2023. The company reported cumulative additional expenses of $59 million, net of recoveries and estimate changes, and said lost revenue from the attack could not be quantified. The attack also affected order-management services and caused significant 2022 expenses.
- Other overhead included $14 million of Q3 expenses related to indirect tax and other contingencies, versus an $11 million recovery of prior cyberattack costs in Q3 2022. Tax audits and examinations could change recorded contingencies; the company could not estimate a range of possible outcomes. Management did not expect existing legal matters to materially affect operations, cash flows or financial position.
- Disclosure controls were deemed ineffective at quarter-end due to a previously reported material weakness in IT program change management. Remediation, including supplemental reviews of direct database changes, was ongoing and might be completed before year-end 2023; management said testing must establish that controls operate effectively.
Key facts for investors to verify
- Whether freight demand, volumes and buy/sell rates stabilize or continue to decline, particularly given excess capacity and customer inventory levels.
- Whether operating cash flow and margins remain adequate as earnings fall and seasonal working-capital requirements fluctuate.
- Progress and testing results for remediation of the material weakness, including implications of the planned multiyear accounting-system transition.
- Developments in tax audits, indirect-tax contingencies, and any further costs or customer impacts from the cyberattack.
- Execution of capital-return plans and the company’s short-term borrowing, lease and other contractual obligations.