Expeditors International of Washington, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The company is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage and related services.
Financial performance
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are against the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $1,516.8 | $895.4 | $2,717.9 | $1,808.0 |
| Net revenues | $418.9 | $330.0 | $780.7 | $666.6 |
| Operating income | $138.5 | $86.9 | $239.0 | $178.4 |
| Net earnings attributable to shareholders | $90.3 | $54.1 | $151.6 | $113.3 |
| Diluted EPS | $0.42 | $0.25 | $0.70 | $0.52 |
| Operating income / net revenues | 33.1% | 26.3% | 30.6% | 26.8% |
- Q2 total revenues rose about 69%, while net revenues increased 27%; first-half total and net revenues rose about 50% and 17%, respectively. Net revenues (revenues less transportation expenses) are management’s preferred measure of service economics.
- Operating income increased about 59% in Q2 and 34% in the first half. Shareholder earnings increased about 67% and 34%, respectively.
- Q2 airfreight net revenues rose 42%, chiefly on a 54% increase in tonnage, partly offset by a 14% fall in net revenue per kilo. Ocean net revenues rose 16%; consolidation volume increased, but per-container net revenue declined. Customs brokerage and other services net revenues increased 21%.
- Cash and cash equivalents were $960.3 million at June 30, up from $925.9 million at year-end; short-term investments were $0.7 million. Working capital was $1.158 billion. The company reported no long-term debt and no borrowings on its credit lines.
- Operating cash flow was $147.7 million for the first half, down from $257.4 million a year earlier. The company attributed the decrease mainly to higher accounts receivable as volumes recovered, partly offset by improved earnings and higher payables. Capital expenditures were $15.7 million; dividends paid were $42.4 million and share repurchases were $71.7 million.
Changes and management commentary
- Management said air and ocean volumes began improving in late 2009 and continued to recover in the first half of 2010. It could not predict whether the improvement would continue or its effect on results.
- Capacity constraints among carriers and higher buy rates pressured unit yields; management said 2010 yields had returned closer to historical levels after unusually favorable spot-market buying in 2009. Competitive pricing pressure remains.
- Q2 foreign-exchange gains contributed to other income: other income, net was $11.6 million versus $4.5 million in Q2 2009. Management cited approximately $6 million of Q2 net FX gains, primarily related to U.S. dollars held in Euro-based subsidiaries as the euro weakened.
- Management estimated 2010 capital expenditures at $90 million, including real estate development, and reported a $27 million commitment for London office/warehouse facilities, expected to be funded in cash during 2010 and 2011. It stated existing cash, financing arrangements and operating cash flows should cover foreseeable capital and liquidity needs.
Risks, contingencies and unusual items
- The company faces ongoing U.S. Department of Justice and European Commission antitrust investigations, plus a U.S. class-action lawsuit alleging price fixing of certain surcharges. The company disputes the allegations and is defending itself. It could not estimate a loss range; adverse outcomes, fines or injunctions could materially affect its financial position, results, cash flows or business. Legal and associated costs were approximately $0.75 million in the first half of 2010; cumulative costs since 2007 were approximately $15 million.
- Seasonality, changes in global trade and customer demand, carrier capacity and financial stability, competitive pricing, foreign exchange movements, and customers’ ability to pay may affect performance. The company highlighted higher receivables and cash advances made for certain customs-related customer obligations.
- At June 30, the company had $79 million of contingent exposure under standby letters of credit and guarantees, primarily supporting carrier credit and customs/VAT deferrals; no amounts were drawn on its bank lines. It also held $477 million of cash and cash equivalents at non-U.S. subsidiaries, including $79 million in U.S. banks, and noted some funds may be subject to currency controls.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the risk factors in the prior Form 10-K were reported.
Investor verification points
- Assess whether the strong volume recovery can persist and whether carrier capacity and buy-rate pressures will further affect per-unit yields.
- Track receivables, operating cash conversion and working-capital needs as shipment volumes rise.
- Review developments in the DOJ, EC and class-action proceedings, for which the filing provides no estimable loss range.
- Monitor execution and cash funding of the estimated $90 million capital program, including the $27 million London facilities commitment.
- Distinguish total revenue growth from net revenue growth, given the substantial transportation costs passed through in freight consolidation.