Expeditors International of Washington, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Expeditors is a non-asset-based global logistics provider. Unless noted, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Key financial results
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Total revenue | $1,475.2m | $1,691.6m | $2,893.6m | $3,369.1m |
| Net revenue (non-GAAP) | $553.1m | $552.1m | $1,070.2m | $1,081.6m |
| Operating income | $178.9m | $182.7m | $330.7m | $351.6m |
| Net earnings attributable to shareholders | $116.1m | $117.8m | $212.6m | $224.5m |
| Diluted EPS | $0.63 | $0.61 | $1.16 | $1.17 |
| Operating margin on net revenue | 32.3% | 33.1% | 30.9% | 32.5% |
| Operating cash flow | $105.1m | $181.7m | $341.0m | $316.1m |
Liquidity, cash flow and capital allocation
- At June 30, cash and cash equivalents were $980.3m; working capital was $1,233m. Current assets were $2,126.8m and current liabilities $894.0m.
- The company reported no long-term debt. Management said cash and operating cash flow should meet capital and liquidity needs for at least the next 12 months and the foreseeable future.
- First-half operating cash flow rose $24.9m year over year, primarily due to working-capital changes, partly offset by lower earnings. Q2 operating cash flow fell $76.7m, also primarily due to working capital.
- First-half capital expenditures were $27.3m; management estimated full-year 2016 capital expenditures at $90m, including routine spending and additional real estate development.
- First-half share repurchases were $166.4m and dividends paid were $73.0m. The semi-annual dividend was $0.40 per share, up from $0.36 in 2015. Shares outstanding were 180.8m at June 30, down from 182.1m at December 31, 2015.
Performance changes and management commentary
- Q2 revenue declined 12.8% and first-half revenue declined 14.1%, while net revenue was nearly flat in Q2 and down 1.1% in H1. Management attributed the gap mainly to lower freight sell rates and corresponding carrier buy rates, with carrier capacity overhang and competitive pricing pressure.
- Airfreight net revenue decreased 4% in Q2 and 8% in H1. Q2 tonnage increased 2%, but net revenue per kilo declined 10%; H1 tonnage fell 4% and net revenue per kilo fell 6%. Excess carrier capacity and competition weighed on yields.
- Ocean net revenue fell 2% in Q2 but increased 3% in H1. Container volume declined 1% in Q2 and 2% in H1; management cited carrier overcapacity, pricing volatility, and lower direct forwarding volumes in some regions.
- Customs brokerage and other services net revenue increased 5% in Q2 and 2% in H1, supported mainly by road freight activity and, in North Asia, warehouse and distribution growth.
- Operating income declined 2.1% in Q2 and 5.9% in H1. Salaries and related costs increased 2% in both periods; as a share of net revenue, these costs rose to 53% in Q2 and 54% in H1. The effective tax rate was 36.5% in Q2 and 37.0% in H1, compared with 37.4% and 37.5% in 2015.
- Q2 diluted EPS increased despite lower shareholder earnings, alongside a reduction in weighted-average diluted shares. H1 diluted EPS was slightly lower year over year.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management described global economic conditions as uncertain and trade as slowing, particularly in Europe; it expects competitive conditions and customer pressure on pricing to continue.
- Management said airfreight may remain affected by carrier overcapacity and customer efforts to reduce logistics costs. Ocean pricing volatility may continue amid carrier liquidity challenges, the Panama Canal expansion, and customer competitive bids.
- Risks include global economic and trade conditions, currency movements, fuel prices, political and regulatory developments, customer credit, and the financial stability and capacity of airlines and ocean carriers. The company noted that some ocean carriers face significant liquidity challenges and said it is selective in carrier use.
- Foreign currency effects were a net gain of approximately $2m in Q2 and a net loss of approximately $2m in H1. The company had no foreign currency derivatives outstanding at June 30.
- Standby letters of credit and guarantees totaled $76m. Ordinary-course legal matters were accrued at amounts management considered insignificant; the company could not estimate any additional reasonably possible loss. Management did not expect these matters to significantly affect operations, cash flows, or financial position.
- Management estimated that future minimum lease payments under noncancelable leases were approximately $131m at December 31, 2015. The company expects a new lease accounting standard to affect its balance sheet when adopted, beginning in 2019.
Important facts for investors to verify
- Whether freight volumes and net revenue per unit stabilize as competitive pricing and carrier capacity conditions evolve.
- Whether operating margins recover, given lower H1 operating income and higher salaries as a percentage of net revenue.
- Whether the $90m full-year capital expenditure estimate, ongoing repurchases, and dividends remain consistent with cash generation and liquidity priorities.
- The exposure to carrier financial distress, foreign exchange fluctuations, and customer or working-capital changes; also monitor the $76m in guarantees and standby letters of credit.
- The filing reports no material change in risk factors from the 2015 Form 10-K; investors should review that filing for the full risk-factor discussion.