Business context and reporting period
Expeditors International of Washington, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2009. The company is a global, non-asset-based logistics provider, principally offering air and ocean freight forwarding, customs brokerage and related services. Financial amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $1,037.3 | $1,564.9 | $2,845.4 | $4,326.5 |
| Net revenue | $346.5 | $429.1 | $1,013.1 | $1,200.8 |
| Operating income | $96.2 | $135.4 | $274.6 | $353.9 |
| Operating income / net revenue | 27.8% | 31.5% | 27.1% | 29.5% |
| Net earnings attributable to shareholders | $57.8 | $85.6 | $171.1 | $223.3 |
| Diluted earnings per share | $0.27 | $0.39 | $0.79 | $1.02 |
| Cash from operating activities | $42.5 | $91.7 | $299.8 | $306.4 |
- At September 30, cash and cash equivalents were $947.3 million; cash, cash equivalents and short-term investments totaled $947.9 million. Working capital was $1,022 million.
- The company reported no long-term debt or short-term borrowings. Current liabilities were $655.1 million and total equity was $1,520.0 million.
- Nine-month investing cash outflow was $35.6 million, including $25.3 million of property and equipment purchases and $9.2 million of land-lease prepayments. Financing cash outflow was $72.6 million, including $77.1 million of share repurchases and $40.3 million of dividends, partly offset by stock issuance proceeds and tax benefits.
- The nine-month dividend was $0.19 per share, compared with $0.16 in 2008. A further $0.19 semiannual dividend was declared for payment in December 2009.
Material changes versus the prior comparable period
- Q3 total revenue fell 34%, net revenue fell 19%, operating income fell 29%, and shareholder earnings fell 33% year over year. Diluted EPS declined from $0.39 to $0.27.
- For the first nine months, total revenue declined 34%, net revenue 16%, operating income 22%, and shareholder earnings 23%. Management characterized the lower nine-month total and net revenues as unprecedented in company history.
- Q3 net revenue declined 22% in airfreight, 26% in ocean freight and ocean services, and 13% in customs brokerage and other services. Airfreight’s decline reflected a 9% fall in tonnage and 14% lower net revenue per kilo; ocean consolidation net revenue fell 37%, with lower volume and revenue per container.
- Salary and related costs fell in dollars but rose to 56% of net revenue in Q3, from 52% a year earlier, reflecting lower activity and the fixed component of salaries. Operating margin on net revenue also contracted. Lower bonuses, headcount, stock compensation and cost-control measures reduced expenses.
- Nine-month operating cash flow decreased by $6.6 million. Cash and cash equivalents increased $206.2 million from year-end 2008, aided by operating cash flow and exchange-rate effects.
Outlook, management commentary and risks
- Management attributed weaker freight volumes primarily to the global economic downturn and said it could not predict the downturn’s ongoing impact or the effectiveness of government stimulus. Customer demand and shipping patterns, supplier capacity and customer credit quality remain uncertain.
- Air and ocean carriers raised prices and removed capacity during 2009. The company said it temporarily absorbed some increases pending customer negotiations, which pressured yields and margins. Competitive pricing pressure persists.
- No earnings or revenue guidance was provided. Management estimated 2009 capital expenditures of approximately $45 million, including real estate acquisitions and development; approximately $10 million was expected in Q4.
- Management said cash, available bank facilities and operating cash flow should meet foreseeable capital and liquidity needs. International credit lines totaled $25 million and a UK facility for standby letters of credit totaled $11 million; no amounts were drawn. The company was contingently liable for $80 million of standby letters of credit and guarantees.
- Antitrust matters remain significant contingencies: DOJ and European Commission investigations concerning freight forwarders and a U.S. class action alleging price fixing on surcharges. The company reported approximately $14 million in cumulative legal and related costs through September 30, could not estimate any potential loss, and warned that adverse outcomes could materially affect its business and financial results.
- Foreign exchange is a market risk: management estimated that, all else equal, a 10% weakening of the U.S. dollar over the nine-month period would have increased operating income by about $21 million, while a 10% strengthening would have reduced it by about $17 million. The company had no currency derivatives outstanding.
- Other noted risks include dependence on third-party carriers, foreign operating and regulatory risks, and seasonal fluctuations. 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 and pricing/yields recover, particularly in air and ocean consolidation, and whether carrier cost increases can be passed to customers.
- Progress and potential financial exposure from the DOJ and EC investigations and the antitrust class action; no loss range was estimable in this filing.
- Whether operating cash flow remains resilient as volumes and working-capital patterns change, and whether the $45 million capital-spending estimate is met.
- Customer collections, credit quality and the company’s substantial cash held by non-U.S. subsidiaries: $471 million, including $63 million held in U.S. banks.
- Execution of cost controls and the effect of salaries and other overhead relative to net revenue if revenue remains weak.