Expeditors International of Washington, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the same 2013 periods. Expeditors is a non-asset-based global logistics provider. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,599 | $1,503 | $3,091 | $2,916 |
| Net revenues | $485 | $472 | $949 | $920 |
| Operating income | $142 | $144 | $278 | $272 |
| Net earnings attributable to shareholders | $91 | $92 | $175 | $173 |
| Diluted EPS | $0.46 | $0.45 | $0.88 | $0.83 |
| Operating income as % of net revenues | 29% | 30% | 29% | 30% |
| Shareholder net earnings as % of net revenues | 18% | 20% | 18% | 19% |
- Q2 revenue rose 6%, but net revenues grew 3%; operating income declined 1% and shareholder net earnings declined 1%. First-half revenue grew 6%, net revenues 3%, operating income 2%, and shareholder net earnings 1%.
- Q2 airfreight net revenue increased 3%, with tonnage up 6% but net revenue per kilo down 4%. Ocean net revenue increased 1%; 12% higher container volume was offset by lower net revenue per container, particularly in consolidation. Customs brokerage and other services net revenue increased 4%.
- First-half operating cash flow was $219 million, down from $249 million. Q2 operating cash flow was $45 million versus $84 million. Management attributed the decreases primarily to working-capital changes.
- At June 30, cash and cash equivalents were $971 million and short-term investments $86 million. Working capital was $1.35 billion; the company reported no long-term debt. Total liabilities were approximately $1.03 billion.
- Cash used in investing activities was $105 million in the first half, including a $27 million escrow deposit for an expected land acquisition. Cash used in financing was $390 million, including $358 million of share repurchases and $63 million of dividends paid. The semiannual dividend was $0.32 per share, up from $0.30.
Material changes and management commentary
- Competitive pricing pressure and lower sell rates compressed yields in air and ocean freight. Management said intense competition, overcapacity, volatile fuel costs, and currency fluctuations were continuing pressures.
- Other overhead expense increased 12% in Q2 and 8% in the first half, reflecting consulting and organizational-change costs, software and systems investment, building and warehousing costs, and claims. Q2 salaries and related costs included a favorable $5 million reduction from healthcare claims experience.
- The second-quarter effective tax rate was 38.2%, compared with 38.6% a year earlier; the first-half rate was 38.5%, compared with 39.0%.
- Asia Pacific contributed 48% of first-half revenue and 38% of operating income. Its operating income as a percentage of revenue is lower, which management attributed to the region’s export-oriented business mix.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management estimated 2014 capital expenditures of approximately $50 million, including routine spending and real estate development, and expected cash and operating cash flow to cover liquidity needs for at least the next 12 months and the foreseeable future.
- Business risks include global trade and economic uncertainty, seasonality, pricing and margin pressure, carrier capacity and financial stability, foreign exchange exposure, and customer credit and collection risk. Management reported no foreign currency derivatives outstanding; its sensitivity analysis estimated that a hypothetical 10% weakening of the U.S. dollar would have increased first-half operating income by about $19 million, while a 10% strengthening would have reduced it by about $15 million.
- The company had $77 million of contingent exposure under standby letters of credit and guarantees, primarily supporting foreign subsidiaries’ carrier credit and customs-related obligations. Management said ordinary-course legal matters were not expected to materially affect operations or financial position; additional possible losses could not be estimated clearly.
- The company is developing a worldwide accounting system to be implemented over several years; related processes will require internal-control testing. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether freight volumes can continue growing while sell-rate reductions and carrier costs pressure yields and net revenue per shipment.
- Whether working-capital movements, particularly receivables and tax payments, continue to weigh on operating cash flow.
- Execution, total cost, and returns from the planned land acquisition, $50 million capital expenditure program, and systems investments.
- The pace and effect of share repurchases on cash balances, outstanding shares, and per-share earnings.
- Potential effects of currency movements, carrier disruptions, and the $77 million standby-letter-of-credit and guarantee exposure.