EXPEDITORS INTERNATIONAL OF WASHINGTON INC quarterly report, Q1 FY2014

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Business context and reporting period

Expeditors International of Washington, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. It is a non-asset-based global logistics provider, with revenue from airfreight, ocean freight and ocean services, and customs brokerage and other services. Unless noted otherwise, amounts below are in millions of dollars. Comparisons are with the first quarter of 2013.

Financial performance and liquidity

  • Revenue: Total revenue was $1,491.6, up 5.6%. Airfreight revenue rose 4% to $647.1; ocean freight and services rose 5% to $469.2; customs brokerage and other services rose 8% to $375.3.
  • Net revenue: The company’s non-GAAP measure, total revenue less directly related service expenses, was $464.6, up 3.7% from $448.0. Airfreight net revenue grew 6%, ocean net revenue 1%, and customs brokerage and other services net revenue 3%.
  • Profit and margins: Operating income increased 5.2% to $135.2; net earnings attributable to shareholders rose 4.4% to $83.8. Basic and diluted EPS were $0.42 versus $0.39. Operating income was 29% of net revenue in both periods. The effective tax rate declined to 38.8% from 39.5%.
  • Cash flow: Operating cash flow was $173.9, versus $165.3. Investing activities used $67.2, including a net $60.2 investment in short-term investments and $8.8 of capital expenditures. Financing activities used $218.4, principally reflecting $226.7 of share repurchases. Cash and cash equivalents declined $116.6 to $1,131.0.
  • Liquidity and debt: Cash, cash equivalents and short-term investments totaled $1,217.5 at quarter-end; working capital was $1,434. The company reported no long-term debt. Total assets were $2,925.5 and total equity was $1,960.0.

Material changes versus the prior comparable period

  • Airfreight tonnage rose 6%, while net revenue per kilo declined 1%. Ocean container volume grew 12%, but ocean consolidation net revenue fell 4% as lower sell rates more than offset volume growth and carriers did not provide commensurate buy-rate reductions.
  • Customs brokerage and other services revenue increased 8%, but related expenses rose 14%; management cited higher volumes and costs, with lower yields in domestic time-definite transportation and import services.
  • Share repurchases increased substantially: the company bought back 5.73 million shares for $226.7, including 5.59 million shares to reduce outstanding shares. The board amended the discretionary plan to target 190 million shares outstanding. Quarter-end shares outstanding were 197.2 million.
  • Foreign currency translation reduced other comprehensive income by $2.4, compared with a $10.0 reduction in the prior-year quarter. Net foreign currency losses were approximately $2 million, versus $1 million.

Outlook, risks and unusual items

  • The filing provides no specific revenue or earnings guidance. Management estimated 2014 capital expenditures of approximately $75 million, including routine spending and additional real estate development, and said liquidity and operating cash flows should meet requirements for at least the next 12 months and the foreseeable future.
  • Management described the first quarter as historically the weakest quarter, with peak-season activity typically starting in late Q2 or early Q3 and continuing into Q4. It expects competitive pricing pressure and unit-margin compression to continue; results also depend on freight volumes, rates, carrier capacity and stability, customer demand, and currency movements.
  • The company was contingently liable for $78 million of standby letters of credit and guarantees, mainly supporting foreign subsidiaries’ carrier credit and customs-duty or VAT deferrals. Management said related underlying obligations are recorded by the subsidiaries and no additional expense would be needed in the unlikely event the parent performed.
  • Ordinary-course claims, lawsuits and investigations were not expected by management to significantly affect operations or financial position; accrued amounts were not significant. The company could not estimate additional reasonably possible losses, if any.
  • Foreign-exchange sensitivity analysis estimated that a hypothetical average 10% weakening of the U.S. dollar would have increased quarterly operating income by about $9 million, while a 10% strengthening would have reduced it by about $7 million. The company had no foreign-currency derivatives outstanding. A 10-basis-point interest-rate change was not expected to have a significant earnings impact.
  • The company is developing a new worldwide accounting system for implementation over several years; management noted the transition will affect financial-reporting processes and require operating-effectiveness testing. Disclosure controls were assessed as effective, and no material quarterly change in internal control over financial reporting was reported.

Important facts for investors to verify

  1. Whether volume gains can support net revenue and profitability as competitive rate reductions and carrier buy-rate negotiations pressure yields, particularly in ocean freight.
  2. The pace and cash-flow effects of the share-repurchase program, including progress toward the 190 million share target and the effect on cash balances.
  3. Whether the $75 million capital-expenditure estimate and management’s liquidity assessment remain appropriate as seasonal working-capital needs rise.
  4. Exposure to foreign exchange, carrier financial stability and capacity, international trade or regulatory changes, and any developments in legal matters or the accounting-system implementation.