Expeditors International of Washington, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Expeditors is a non-asset-based global logistics provider in 63 countries, offering air and ocean freight forwarding, customs brokerage, and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $1,410.5 | $1,411.4; down 0.1% |
| Net revenue (revenue less transportation expense) | $445.3 | $446.6; down 0.3% |
| Operating income | $128.5 | $125.3; up 2.6% |
| Operating income / net revenue | 28.9% | 28.0% |
| Net earnings attributable to shareholders | $80.3 | $76.7; up 4.7% |
| Diluted EPS | $0.39 | $0.36 |
| Operating cash flow | $165.3 | $147.4 |
| Cash and cash equivalents, March 31 | $1,394.7 | $1,260.8 at Dec. 31, 2012 |
Net revenue mix was customs brokerage and other services 42%, airfreight 35%, and ocean freight and services 23%. Gross profit/net revenue margin was 31.6% of total revenue. The effective tax rate was approximately 39.5%, versus 40.6% in Q1 2012. Working capital was $1.599 billion; current assets were $2.431 billion and current liabilities $831.7 million. The company reported no long-term debt.
Changes and operating drivers
- Airfreight net revenue declined 1.5%, primarily reflecting a 2% reduction in net revenue per kilo, partly offset by slightly higher tonnage. Management cited smaller, lighter technology products and customers shifting shipments to deferred air or ocean freight.
- Ocean freight and services net revenue fell 2%. Carrier rate increases outpaced timely customer sell-rate adjustments; ocean consolidation net revenue declined 6%, with container volume down 4% and net revenue per container down 2%.
- Customs brokerage and other services net revenue rose 2%, with higher volumes partly offset by increased domestic transportation buy rates and costs.
- Overhead expenses fell 1.4% to $316.8 million. Other overhead declined 9%, mainly because Q1 2012 included a €4.14 million (approximately $5.5 million) European Commission fine for alleged anti-competitive behavior. Depreciation and amortization increased about $1.7 million, attributed to technology, building, and leasehold investments.
- Foreign currency translation reduced other comprehensive income by $10.0 million, compared with a $10.2 million gain in Q1 2012.
Cash flow, capital allocation, and outlook
Operating cash flow increased by about $17.9 million, which management attributed primarily to higher earnings and working-capital changes. Investing activities used $10.5 million, including $10.1 million of capital expenditures, compared with $17.1 million of capital expenditures in Q1 2012. Financing activities used $13.4 million, including $17.7 million of share repurchases and $7.7 million to purchase a noncontrolling interest, partly offset by stock-option proceeds.
Management estimated 2013 capital expenditures at approximately $100 million, including real estate development. It said cash and operating cash flows should meet capital and liquidity needs for at least the next 12 months and thereafter for the foreseeable future. No specific earnings or revenue guidance was provided. Management expected current freight-market trends to continue in the near term absent meaningful improvement in global economic conditions. A semi-annual dividend of $0.30 per share was declared May 1, payable June 17, 2013, to holders of record June 3.
Risks, contingencies, and other matters
- Key exposures include intense price competition, uncertain global trade and economic conditions, fuel and carrier costs, carrier capacity and financial stability, customer shipping patterns, foreign exchange, political and regulatory developments, and customer credit risk. First quarter is historically the weakest seasonal quarter, though historical patterns may not continue.
- The company reported $98 million of contingent standby letters of credit and guarantees, primarily supporting foreign subsidiaries’ carrier credit and customs/VAT obligations. Management said the underlying obligations were already recorded by those subsidiaries.
- Ordinary-course legal claims, lawsuits, and investigations were not expected by management to have a significant effect; recorded accruals were not significant. The company could not estimate any additional reasonably possible loss.
- A 10% weakening of the U.S. dollar was estimated to increase operating income by approximately $9 million; a 10% strengthening was estimated to reduce it by approximately $7 million. A 10-basis-point interest-rate change was not expected to have a significant earnings impact.
- Cash and cash equivalents held by non-U.S. subsidiaries totaled $693 million; management noted that foreign exchange controls may affect repatriation. No foreign currency derivatives were outstanding at quarter-end.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. Risk factors were unchanged from the 2012 Form 10-K.
Important facts for investors to verify
- Whether airfreight tonnage and pricing stabilize, and whether ocean carrier rate increases can be passed through to customers.
- Whether the improvement in operating margin and earnings persists after adjusting for the prior-year European Commission fine.
- Progress against the approximately $100 million 2013 capital-expenditure estimate and the effect of investment on cash generation.
- The nature and potential financial impact of legal matters and the $98 million in guarantees and standby letters of credit.
- Foreign-cash availability, currency exposure, and the sustainability of share repurchases and dividend payments.