Expeditors International of Washington, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Expeditors is a non-asset-based global logistics provider. Management said COVID-19 materially disrupted first-quarter operations and expected disruption to continue through the remainder of 2020.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,901.9 million | $2,020.1 million | -6% |
| Operating income | $159.1 million | $187.6 million | -15% |
| Operating margin | 8.4% | 9.3% | -0.9 percentage points |
| Net earnings attributable to shareholders | $122.3 million | $139.7 million | -12% |
| Diluted earnings per share | $0.71 | $0.80 | -11% |
| Net cash from operating activities | $165.0 million | $289.5 million | -43% |
Revenue by service: airfreight fell 1% to $709.0 million; ocean freight and ocean services fell 13% to $493.4 million; customs brokerage and other services fell 5% to $699.4 million. The effective tax rate was 26.6%, down from 28.3%.
At March 31, 2020, cash and cash equivalents were $1,112.0 million, working capital was $1,460 million, and total assets were $3,510.0 million. The company reported no long-term debt; operating lease liabilities totaled $377.4 million, including current and noncurrent portions. Current assets were $2,618.8 million and current liabilities were $1,159.2 million. Cash declined $118.5 million from year-end 2019, including substantial share repurchases and adverse foreign-exchange effects.
Material changes and management commentary
- COVID-19-related closures, travel restrictions and weaker trade reduced freight volumes. China and the United States experienced the largest first-quarter declines in results; China, including Hong Kong, represented 23% of revenue and 25% of operating income, versus 27% and 29% in Q1 2019.
- Airfreight tonnage declined 7%, while average sell rates rose 6%; average buy rates increased 8%, reflecting constrained capacity and greater use of charter flights and spot-market purchases.
- Ocean consolidation container volume fell 10%. North Asia ocean revenue and expenses declined 31% and 32%, respectively. Carriers reduced capacity, and management cited continuing pricing volatility.
- Operating cash flow fell by $124 million year over year, primarily due to working-capital changes, including lower customer collections. Capital expenditures were $6.1 million; management estimated full-year 2020 capital expenditures of approximately $50 million.
- The company repurchased 4.0 million shares for $283.2 million in the quarter, compared with 0.6 million shares for $44.3 million in Q1 2019. After quarter-end, the board declared a $0.52-per-share semiannual dividend, payable June 15, 2020.
Outlook, risks and contingencies
Management provided no specific earnings or revenue guidance. It expected pandemic-related disruption to continue through 2020 and warned that a prolonged global economic and trade slowdown could further reduce volumes and results. Risks include limited air and ocean carrier capacity, carrier financial stress, volatile freight prices, customers’ ability to pay, increased credit losses, and the possibility that higher transportation costs cannot be passed through. Management said cash and operating cash flows should be sufficient for liquidity needs for at least the next 12 months.
At March 31, the company had $68 million of contingent exposure under standby letters of credit and guarantees. Ordinary-course legal matters were not expected by management to have a significant effect; accrued amounts were not significant, and additional potential losses could not be estimated. Tax contingencies may change as audits and examinations progress. Adoption of the new credit-loss standard had an immaterial financial-statement effect, including a $6 million opening retained-earnings adjustment.
Important facts for investors to verify
- Whether subsequent filings show the expected duration and financial effects of COVID-19 disruptions, especially on freight volumes, carrier capacity and pricing.
- Whether customer collections, receivables and credit-loss allowances deteriorate as customers face cash-flow pressure.
- Whether operating cash flow and liquidity remain adequate alongside planned capital expenditures, lease obligations, dividends and any further share repurchases.
- Whether the $50 million capital expenditure estimate, declared dividend and management’s liquidity assessment change in later periods.
- Whether tax audits, carrier-related risks or other contingencies result in material additional costs or liabilities.