Business context and reporting period
Expeditors International of Washington, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage, and related services. Management uses net revenue—revenue less directly related service expenses—as a key operating measure.
Financial performance
Amounts below are in U.S. dollars; figures are rounded. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $1.672 billion, up 13% | $3.217 billion, up 11% |
| Net revenue | $563.6 million, up 2% | $1.091 billion, up 2% |
| Operating income | $168.2 million, down 6% | $314.4 million, down 5% |
| Net earnings attributable to shareholders | $108.9 million, down 6% | $202.1 million, down 5% |
| Diluted EPS | $0.60, versus $0.63 | $1.11, versus $1.16 |
| Operating income as a share of net revenue | 29.8%, versus 32.4% | 28.8%, versus 30.9% |
Q2 service trends: Airfreight net revenue fell 3%, as a 17% decline in net revenue per kilo more than offset 9% tonnage growth. Ocean net revenue rose 1%; ocean consolidation net revenue fell 10%, largely due to lower net revenue per container. Customs brokerage and other services net revenue increased 6%, supported by higher customs and road freight volumes. Across services, higher carrier buy rates and competitive pricing pressured margins.
Cash, liquidity and capital: Six-month operating cash flow was $276.9 million, down from $341.1 million. Capital expenditures were $33.1 million; management estimated 2017 capital expenditures at approximately $100 million. At June 30, cash and cash equivalents were $1.115 billion, working capital was $1.487 billion, and the company had no long-term debt. Financing cash outflow was $116.8 million, including $137.960 million of share repurchases and $75.726 million of dividends, partly offset by $96.866 million in proceeds from stock issuance. The company stated that cash and operating cash flow should meet liquidity needs for at least the next 12 months and the foreseeable future.
Material changes and notable items
- Revenue growth outpaced net revenue growth, while operating income and earnings declined. Salaries and related costs rose 9% in Q2 and increased to 56% of net revenue, reflecting higher staffing, pay and share-based compensation.
- Operating results benefited from recovery of approximately $8 million in legal and related costs in Q2 and the first half, and a $6 million favorable resolution of an indirect-tax contingency in Q2. Management does not expect further recoveries in either matter.
- Cash increased from $974.4 million at December 31, 2016. The balance sheet also includes $80 million of Miami land and buildings classified as held for sale; a May sale agreement was terminated, and the property remains marketed.
- Foreign-currency losses were approximately $4 million in Q2 and $9 million for the first half. The filing reports no foreign currency derivatives outstanding.
- The declared and paid dividend was $0.42 per share, compared with $0.40 in 2016.
Outlook, risks and contingencies
- Management gave no earnings or revenue guidance. It expects continued pricing volatility as carriers adjust capacity and rates, and warns that higher carrier costs may not be fully passed through to customers. Competitive pressure, ocean-carrier liquidity and capacity, trade and economic uncertainty, fuel costs, seasonality, and foreign exchange are identified risks.
- Management expects approximately $100 million of 2017 capital expenditures. It also cited ongoing investment in people, technology and facilities.
- The company expects to adopt the revenue-recognition standard on January 1, 2018 using the modified retrospective method. It anticipated changes to recognition timing but did not expect a material impact on results, financial position or cash flows; assessment and systems work were still underway.
- New lease accounting takes effect for the company on January 1, 2019. Future minimum payments under noncancelable leases were approximately $214 million at June 30, 2017; the full accounting impact was still being evaluated.
- Standby letters of credit and guarantees totaled $71 million. Ordinary-course legal matters had no significant accruals, and management could not estimate any additional reasonably possible losses.
- A new risk-factor disclosure highlights potential material effects from cyberattacks, system or service-provider disruptions, and other network-continuity failures.
Important facts for investors to verify
- Whether net revenue and operating margins recover as freight volumes grow and carrier buy rates and customer pricing evolve.
- How much reported overhead and earnings benefited from the $8 million cost recovery and $6 million tax-contingency resolution, and whether comparable benefits recur.
- Whether operating cash flow, working capital and planned capital spending remain consistent with management’s liquidity assessment.
- Progress and eventual financial and control effects of the 2018 revenue-recognition and 2019 lease-accounting implementations.
- Status and potential proceeds from the Miami property sale, and the scale of exposure to carrier, currency, cybersecurity and other disclosed risks.