Expeditors International of Washington, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company is a non-asset-based global logistics provider focused on air and ocean freight, customs brokerage, and related services. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $1,500.5 | $1,505.0 | $2,910.9 | $2,916.3 |
| Net revenues (non-GAAP) | $469.1 | $453.7 | $914.4 | $900.2 |
| Operating income | $143.6 | $132.4 | $272.1 | $257.7 |
| Net earnings attributable to shareholders | $92.3 | $84.0 | $172.6 | $160.7 |
| Diluted EPS | $0.45 | $0.39 | $0.83 | $0.75 |
| Operating income as % of net revenues | 31% | 29% | 30% | 29% |
- Q2 revenue edged down 0.3%, while net revenues rose 3.4%, operating income rose 8.4%, and attributable earnings rose 10.0%. For the first half, revenue declined 0.2%, while net revenues increased 1.6%, operating income 5.6%, and attributable earnings 7.4%.
- Q2 airfreight tonnage increased 5%; airfreight net revenues increased 4%. Ocean container volume rose 2%, and ocean net revenues increased 5%, benefiting from favorable buying opportunities. Customs brokerage and other-services net revenues increased 2%, though that category’s margin percentage declined, partly due to domestic time-definite transportation costs.
- For the first half, airfreight tonnage increased 3%, ocean container volume was flat, and customs brokerage and other-services net revenues increased 2%.
- Net cash from operating activities was $84.0 million in Q2 and $249.3 million for the first half, versus $92.8 million and $240.2 million, respectively, in 2012. First-half capital expenditures were $27.2 million; management estimated full-year 2013 capital expenditures of approximately $80 million.
Liquidity, balance sheet, and capital allocation
- At June 30, cash and cash equivalents were $1,286.1 million and short-term investments were $89.9 million, totaling $1,376.0 million. Working capital was $1,616 million. The company reported no long-term debt.
- Cash and short-term investments increased from $1,261.0 million at December 31, 2012. Six-month operating cash flow was partly offset by investing outflows of $116.2 million, including $89.8 million of net purchases of short-term investments, and financing outflows of $88.8 million.
- The company paid dividends of $0.30 per share in the first half, compared with $0.28 in 2012, and repurchased $39.3 million of stock. Shares outstanding were 206.3 million at June 30.
- Foreign subsidiaries held $712 million of cash and cash equivalents; $64 million of that amount was held in U.S. banks. Management stated that foreign earnings are not considered indefinitely reinvested and that deferred taxes have been accrued on undistributed earnings, net of related tax credits.
Changes, outlook, and risks
- Management attributed improved first-half operating results mainly to higher earnings and favorable buy rates. It said first-half margin percentages improved slightly from 2012. Ocean sell rates remained pressured by excess carrier capacity and some customers shifting allocations to direct carrier contracts.
- No revenue or earnings forecast was provided. Management believed existing cash and operating cash flows would meet capital and liquidity needs for at least the next 12 months and thereafter for the foreseeable future.
- Other overhead expenses benefited from the absence of a €4.14 million ($5.5 million) European Commission fine incurred in Q1 2012, as well as lower legal expenses and certain tax-system changes. Depreciation and amortization increased with technology and facility investments.
- Key exposures include global economic and trade conditions, intense pricing competition, volatile carrier capacity and financial stability, foreign exchange movements, and seasonal shipping and working-capital fluctuations. A hypothetical 10% weakening of the U.S. dollar over the first half would have increased operating income by about $19 million; a 10% strengthening would have reduced it by about $15 million, before secondary effects.
- Standby letters of credit and guarantees totaled $94 million. Management said ordinary-course legal matters were not expected to have a significant effect; recorded accruals were not significant, and additional possible losses could not be estimated. The filing reported no material change in previously disclosed risk factors.
- Foreign currency translation produced a first-half other comprehensive loss of $21.0 million. Disclosure controls were judged effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improvement in operating income and net revenues can persist amid weak or uncertain freight demand, excess ocean capacity, and pricing pressure.
- How volume, sell rates, buy rates, and service mix affect net revenues and margins; net revenues are a company-defined non-GAAP measure.
- Cash conversion and working-capital trends, including seasonal receivables and tax payments, alongside the planned $80 million of 2013 capital spending.
- Foreign-currency exposure, cash held by non-U.S. subsidiaries, and the $94 million of guarantees and standby letters of credit.
- The effect of the prior-year European Commission fine and any developments in ongoing legal or government matters.