Business context and reporting period
Expeditors International of Washington, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company is a non-asset-based global logistics provider, offering air and ocean freight forwarding, customs brokerage and related services. Unless noted otherwise, dollar amounts below are in millions.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $1,581.4 | $1,516.8 | $3,042.2 | $2,717.9 |
| Net revenue | $472.6 | $418.9 | $926.5 | $780.7 |
| Operating income | $152.3 | $138.5 | $299.5 | $239.0 |
| Net earnings attributable to shareholders | $95.0 | $90.3 | $186.2 | $151.6 |
| Diluted EPS | $0.44 | $0.42 | $0.86 | $0.70 |
| Operating income as % of net revenue | 32% | 33% | 32% | 31% |
Q2 operating cash flow was $78.1 million, compared with $20.5 million; six-month operating cash flow was $255.9 million, compared with $147.7 million. Management attributed the improvement mainly to higher earnings and working-capital changes. Cash and cash equivalents were $1,225.8 million at June 30; cash, cash equivalents and short-term investments totaled $1,226.9 million. Working capital was $1,392 million. The company had no long-term debt or short-term borrowings.
Six-month capital expenditures were $38.2 million; management estimated full-year 2011 capital expenditures of approximately $90 million, including real estate development. The company paid a $0.25-per-share semiannual dividend, up from $0.20 a year earlier, and repurchased $65.3 million of stock during the first half.
Material changes and management commentary
- Q2 revenue rose 4% year over year, while net revenue rose 13%, operating income 10%, and shareholder-attributable earnings 5%. For the first half, revenue rose 12%, net revenue 19%, operating income 25%, and attributable earnings 23%.
- Q2 airfreight net revenue increased 7%, chiefly from a 12% increase in net revenue per kilo, despite a 1% decline in tonnage. Ocean net revenue rose 17%, largely from higher revenue per container with FEU volume flat. Customs brokerage and other services net revenue rose 16%, reflecting market-share growth and higher domestic time-definite freight volumes.
- Management cited slower global economic activity and uncertainty affecting shipment volumes and consumer demand. Limited spot-market buying opportunities, particularly in Asia, supported higher air and ocean revenue per unit. Salary costs increased 13% in Q2, primarily due to higher bonuses and headcount; other overhead rose 20%.
- Other income declined substantially from Q2 2010, mainly because foreign-exchange gains were lower. The effective income tax rate was approximately 38.8% in Q2 versus 39.8% a year earlier.
Outlook, risks and contingencies
Management said available cash and operating cash flows should meet capital and liquidity needs for the foreseeable future. No earnings or revenue guidance was provided. Results remain exposed to seasonality, global trade and economic conditions, competitive pricing pressure, customer demand, carrier capacity and financial stability, foreign exchange, and geopolitical or regulatory developments. The company noted current Middle East events and possible effects on trade and oil prices.
Antitrust matters remain a significant contingency: U.S. DOJ and European Commission investigations, a U.S. customer class action alleging surcharge price fixing, and a Brazilian administrative proceeding. The company disputes the allegations and cannot estimate potential losses. It reported approximately $16 million of legal and associated costs since the proceedings began; adverse outcomes could include substantial fines, damages or conduct remedies and materially affect results, cash flows or financial condition. The company also identified technology dependence and potential system disruption or security breaches as a risk. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher net revenue per unit and limited spot-market opportunities persist as global volumes and market conditions change.
- Whether operating-cost growth, particularly salaries and other overhead, continues to affect margins.
- Developments and potential financial exposure in the antitrust investigations and litigation, for which the filing provides no estimable loss range.
- Progress and funding of the approximately $90 million full-year capital expenditure plan, and the continued adequacy of cash flows and liquidity.
- Exposure to currency movements, carrier capacity and stability, global trade conditions, and technology or cybersecurity disruptions.