Expeditors International of Washington, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise. Comparisons are with 2021.
Business context
Expeditors is a non-asset-based global logistics provider. Its principal services are airfreight, ocean freight and ocean services, and customs brokerage and other services. Results are sensitive to shipment volumes and freight buy and sell rates. Management reported softening demand and declining rates as supply-chain congestion eased, alongside ongoing inflation, capacity constraints and pandemic-related disruption.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4,362 | $4,319 | $13,630 | $11,127 |
| Operating income | $527 | $490 | $1,495 | $1,286 |
| Net earnings attributable to shareholders | $414 | $359 | $1,138 | $963 |
| Diluted earnings per share | $2.54 | $2.09 | $6.84 | $5.61 |
| Operating cash flow | $670 | $177 | $1,643 | $563 |
- Q3 revenue increased 1%, operating income 8%, and shareholder net earnings 15%; diluted EPS increased 22%. Nine-month revenue rose 22%, operating income 16%, shareholder net earnings 18%, and diluted EPS 22%.
- Operating margin was approximately 12.1% in Q3 versus 11.3% a year earlier; for the nine months it was approximately 11.0% versus 11.6%. Shareholder net margin was approximately 9.5% versus 8.3% in Q3 and 8.3% versus 8.7% year to date.
- Q3 service revenue: airfreight $1,481 million, down 9%; ocean freight and services $1,685 million, up 5%; customs brokerage and other services $1,197 million, up 10%. Nine-month growth was 5%, 48%, and 18%, respectively.
- Q3 airfreight tonnage fell 13%; average sell and buy rates rose 4% and 2%. Ocean consolidation shipments fell 10%, while average sell and buy rates rose 20% and 21%. The filing attributes rate and volume patterns to softer demand, capacity and supply-chain conditions, and comparison with unusually strong 2021 volumes.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $2,155 million at September 30, 2022, up from $1,729 million at December 31, 2021. Working capital was $2,881 million.
- The company reported no long-term debt other than lease liabilities. It had $31 million borrowed on short-term credit lines and $70 million of contingent standby letters of credit and guarantees.
- Cash from operations for the first nine months was $1,643 million, versus $563 million in 2021. Management attributed the improvement primarily to receivables collections and higher earnings. Investing cash outflow was $69 million, including $68 million of capital expenditures.
- Financing cash outflow was $1,048 million, including $1,018 million for repurchases of 9.5 million shares and $110 million of dividends. The board declared a further $0.67-per-share semiannual dividend after quarter-end. Anticipated 2022 capital expenditures were approximately $80 million.
- Fixed lease payments totaled $563 million, including $107 million due within 12 months; purchase obligations were $336 million. Management believes cash and operating cash flows will meet liquidity needs for at least the next 12 months and the foreseeable future.
Material changes, outlook and risks
- Cyber-attack: A targeted attack discovered February 20, 2022 led the company to shut down most global connectivity, operating and accounting systems. Operations were limited for about three weeks. Systems were restored and used to deliver services in Q2 and Q3; customer diversion caused lower shipment volumes in Q1 and, to a lesser extent, Q2, but the financial impact on revenue and operating income could not be quantified.
- The company recorded approximately $55 million of incremental demurrage costs for the first nine months, including a $7 million downward estimate revision in Q3, and approximately $15 million of investigation, remediation and potential shipment-claim costs, revised downward by $11 million in Q3. It is seeking recovery of demurrage costs; any recovery will be recognized when realized. The ultimate direct and indirect financial impact remains unquantifiable, and additional costs or customer indemnities may arise.
- Management did not provide numerical financial guidance. It expected pandemic-related constraints to continue to some degree through 2022, and freight-rate volatility to persist as demand, capacity, fuel prices and congestion changed. Management cautioned that further declines in demand or rates could significantly reduce revenue, expenses and operating income; unusually high rates and operating conditions were not expected to be sustained long term.
- Key risks include global economic slowdown and inventory buildup, inflation and fuel costs, carrier capacity and service-provider stability, trade and geopolitical changes, foreign exchange exposure, customer credit risk, and continuing cyber and systems risks. Management said it did not expect further material adverse business impact from the cyber-attack, while also stating it could not estimate the attack’s ultimate financial impact.
- Ordinary-course legal matters were not expected to have a significant effect; accrued amounts were not significant. The company could not estimate additional possible losses, including potential cyber-related claims. The effective tax rate was 22.6% for Q3 and 24.4% for the first nine months, benefiting from U.S. FDII deductions. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether declining freight rates and shipment volumes continue, and how that affects operating income and margins.
- Actual recovery, if any, of the approximately $55 million in cyber-related demurrage charges, plus the ultimate cost of claims and remediation.
- Receivables quality and cash conversion, particularly given historically high freight rates and customer payment extensions.
- Execution of the $80 million 2022 capital expenditure plan, share repurchases, and the declared dividend alongside lease and purchase obligations.
- Foreign-exchange sensitivity: the filing estimates that a 10% average weakening of the U.S. dollar over the first nine months would have increased operating income by about $112 million, while a 10% strengthening would have reduced it by about $92 million.