Expeditors International of Washington, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
Expeditors is a non-asset-based global logistics provider, with airfreight, ocean freight and services, and customs brokerage and other services as its principal revenue categories. The pandemic materially disrupted global trade and freight capacity. In Q3, strong demand and constrained air capacity—particularly for shipments out of North Asia—drove airfreight rates sharply higher.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Revenue | $2,464.8m | $2,074.9m | +18.8% | $6,947.3m | $6,130.5m | +13.3% |
| Operating income | $251.9m | $206.6m | +22.0% | $658.6m | $586.4m | +12.3% |
| Net earnings attributable to shareholders | $191.3m | $160.2m | +19.4% | $497.5m | $453.1m | +9.8% |
| Diluted EPS | $1.12 | $0.92 | +21.7% | $2.92 | $2.60 | +12.3% |
| Operating margin | 10.2% | 10.0% | Up 0.3 pts | 9.5% | 9.6% | Down 0.1 pts |
Service trends: Q3 airfreight revenue increased 53% as average sell rates rose 70%, while tonnage declined 5%; airfreight expense rose 59%, reflecting a 73% increase in average buy rates. Ocean revenue rose 5% in Q3 but declined 6% for the nine months. Customs brokerage and other services revenue fell 2% in Q3 and 7% year to date, mainly due to lower shipment volumes. Management said air buy rates, though still historically high, declined sequentially from Q2.
Cash flow and liquidity: Operating cash flow was $161.6m in Q3, versus $161.5m a year earlier; year-to-date operating cash flow was $513.3m, down from $606.7m. Management attributed the year-to-date decline primarily to working-capital movements, including higher receivables associated with airfreight revenue growth. Cash and equivalents were $1,465.5m at September 30, up from $1,230.5m at year-end 2019. Working capital was $1,913m and the current ratio was approximately 2.28x. The company reported no long-term debt; operating lease liabilities were $428.1m on the balance sheet. Capital expenditures were $37.4m year to date.
Other metrics: The effective tax rate was 24.6% for Q3 and 25.9% for the first nine months. China, including Hong Kong, represented 30% of Q3 revenue and 26% of Q3 operating income. For the first nine months, those shares were 31% and 30%, respectively.
Material changes and notable items
- Airfreight revenue growth was rate-led, not volume-led: year-to-date average sell rates increased 69%, while tonnage declined 8%. North Asia was an exception, with tonnage up 7% year to date.
- Year-to-date share repurchases were $314.2m for 4.4m shares; none occurred in Q3. Dividends paid year to date totaled $86.8m. A further $0.52-per-share semiannual dividend was declared after quarter-end, payable December 15, 2020.
- The company issued $174.0m of common stock through employee stock plans during the first nine months. It acquired a less-than-truckload digital shipping platform in May 2020.
- Adoption of the expected-credit-loss accounting standard on January 1, 2020 had an immaterial overall financial-statement effect and included a $6.1m adjustment to opening retained earnings.
Outlook, risks and contingencies
- Management expected pandemic-related disruption to continue into 2021, but said the duration and financial effects were uncertain. It did not provide numerical earnings or revenue guidance.
- Key risks include recession-driven shipment declines, volatile freight rates and capacity, financial stress among carriers, customer credit deterioration, and changing trade policies. Management also noted risk from customers’ ability to pay and possible future bad-debt allowances.
- Management estimated 2020 capital expenditures at approximately $50m. It believed cash and operating cash flows would meet liquidity needs for at least the next 12 months and the foreseeable future.
- Contractual cash obligations totaled $654.4m, including $499.3m of operating lease commitments and $117.1m of unconditional purchase obligations. Standby letters of credit and guarantees totaled $72m.
- Ordinary-course legal matters were not expected by management to have a significant effect; accrued amounts were not significant. Tax audits and interpretations of tax law could change recorded tax contingencies, with timing and ultimate outcomes uncertain.
Most important facts for investors to verify
- Whether elevated airfreight rates and North Asia demand persist, and how changes in buy rates affect unit profitability.
- Whether freight volumes recover in weaker customer sectors and whether customer or carrier financial stress leads to credit losses or service disruption.
- Whether working-capital needs—especially receivables—continue to constrain operating cash flow as revenue and shipment levels change.
- Progress against the approximately $50m capital-spending estimate and the financial contribution, if any, from the acquired digital platform.
- Developments in tax examinations, trade policy, and the pandemic’s effects on global trade and the company’s China-related revenue and operating income concentration.