Expeditors International of Washington, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. Expeditors is a non-asset-based global logistics provider. Results were significantly affected by COVID-19, which disrupted trade and carrier capacity; unusually high airfreight rates, especially on exports from North Asia, lifted quarterly revenue despite lower freight volumes in most regions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $2.581 billion | $2.036 billion | $4.482 billion | $4.056 billion |
| Operating income | $247.6 million | $192.2 million | $406.7 million | $379.8 million |
| Net earnings attributable to shareholders | $183.9 million | $153.1 million | $306.2 million | $292.8 million |
| Diluted EPS | $1.09 | $0.88 | $1.80 | $1.67 |
| Operating cash flow | $186.7 million | $155.7 million | $351.7 million | $445.2 million |
- Q2 revenue increased 27%, operating income 29%, shareholder earnings 20%, and diluted EPS 24% year over year. H1 revenue rose 11%, operating income 7%, shareholder earnings 5%, and diluted EPS 8%.
- Calculated operating margin was approximately 9.6% in Q2 2020 versus 9.4% in Q2 2019; for H1 it was 9.1% versus 9.4%. Shareholder net margin was approximately 7.1% versus 7.5% in Q2 and 6.8% versus 7.2% in H1.
- Airfreight revenue surged 93% in Q2 and 47% in H1, primarily as average sell rates rose 133% and 69%, respectively; tonnage declined 10% and 9%. Ocean revenue declined 10% in Q2 and 11% in H1. Customs brokerage and other services revenue declined 13% and 9%.
- Cash and equivalents were $1.180 billion at June 30, 2020, down from $1.230 billion at year-end 2019. Working capital was $1.570 billion. The company reported no debt other than operating lease liabilities; current and noncurrent lease liabilities totaled approximately $430 million.
- H1 operating cash flow fell $93 million year over year, mainly due to working-capital changes, including receivables growth associated with higher Q2 airfreight revenue. Capital expenditures were $28.2 million; anticipated 2020 capital expenditures were approximately $60 million.
Material changes, outlook and risks
- Airfreight capacity contracted as passenger flights were cancelled while demand for medical supplies, PPE and technology shipments rose. Charter flights and spot capacity purchases contributed to historically high buy and sell rates; rates peaked in April and May and began declining in June.
- North Asia was a notable exception to broader volume weakness. China, including Hong Kong, represented 37% of Q2 revenue and 38% of operating income, compared with 26% and 28% a year earlier. H1 shares were 31% and 33%, respectively, versus 26% and 28%.
- Management expected pandemic disruption to continue at least through the remainder of 2020 but provided no specific earnings or revenue guidance. It said current cash and operating cash flows should meet liquidity needs for at least 12 months and thereafter for the foreseeable future.
- Key risks include recession-related freight declines; volatile carrier capacity, rates and service-provider financial health; customer credit deterioration and potential bad debts; trade restrictions and tariffs; foreign exchange; and the ability to pass higher transportation costs to customers. The company also noted competitive, regulatory, and key-personnel risks.
- The company repurchased 4.4 million shares in H1 for $314.2 million and paid a semiannual dividend of $0.52 per share. In May it acquired a less-than-truckload digital online shipping platform. A $6.1 million opening retained-earnings adjustment followed adoption of the credit-loss accounting standard; management said the adoption’s overall financial-statement effect was immaterial.
- Legal claims and investigations arose in the ordinary course; management did not expect them to have a significant effect, and accrued amounts were not significant. Tax audits and uncertain interpretations may cause future tax contingencies to change.
Investor verification points
- Assess whether elevated airfreight rates and North Asia demand were temporary, and how subsequent rate and capacity changes affected margins.
- Track receivables, collections, credit-loss allowances and operating cash flow as pandemic-related customer stress evolves.
- Verify the pace of recovery in ocean, customs and other services, and whether lower volumes or carrier costs pressure operating profitability.
- Monitor China’s contribution to revenue and operating income, as well as foreign-exchange and tax exposures.
- Review capital spending, share repurchases, dividends and the performance of the newly acquired digital shipping platform.