Expeditors International of Washington, Inc. — Q3 2019 Form 10-Q
Business and period: Expeditors is a non-asset-based global logistics provider offering air and ocean freight, customs brokerage and related services. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,074.9 | $2,090.9 | $6,130.5 | $5,902.8 |
| Operating income | $206.6 | $203.2 | $586.4 | $579.6 |
| Net earnings attributable to shareholders | $160.2 | $162.7 | $453.1 | $439.0 |
| Diluted EPS | $0.92 | $0.92 | $2.60 | $2.46 |
| Net cash from operating activities | $161.5 | $86.7 | $606.7 | $470.8 |
- Q3 revenue decreased 0.8%; operating income rose 1.7%, while shareholder net earnings declined 1.5%. Nine-month revenue increased 3.9%, operating income 1.2%, and shareholder net earnings 3.2%.
- Calculated operating margin was approximately 10.0% in Q3 2019 versus 9.7% in Q3 2018, and 9.6% for the first nine months versus 9.8% in 2018. Calculated net margin attributable to shareholders was approximately 7.7% in Q3 versus 7.8%, and 7.4% year to date versus 7.4%.
- Q3 airfreight revenue fell 14%, ocean revenue was essentially flat, and customs brokerage and other services revenue rose 15%. For nine months, the respective changes were down 8%, up 4%, and up 19%.
- Management attributed weaker airfreight primarily to lower tonnage and sell rates amid soft demand, slowing global growth and trade disputes. Customs brokerage growth reflected greater demand for brokerage and time-definite road freight services. Q3 airfreight tonnage declined 7% and ocean containers shipped in ocean freight consolidation declined 2%.
Financial position and liquidity
- At September 30, cash and cash equivalents were $1,216.0 million, total assets $3,706.5 million, and working capital $1,586 million. Cash increased from $923.7 million at December 31, 2018.
- The company reported no long-term debt; operating lease liabilities were $375.4 million, including $61.8 million current and $313.6 million noncurrent. Lease accounting adoption added right-of-use assets and liabilities to the balance sheet in 2019.
- Nine-month capital expenditures were $37.9 million. Management estimated full-year 2019 capital expenditures at $50 million, including technology investment.
- Nine-month financing cash use was $268.6 million, including $296.9 million of share repurchases and $85.2 million of dividends, partly offset by $120.2 million from stock issuance. The May 2019 dividend was $0.50 per share; a further $0.50 semi-annual dividend was declared November 4, payable December 16, 2019.
- Management stated cash and operating cash flows should meet liquidity needs for at least the next 12 months and the foreseeable future. Standby letters of credit and guarantees totaled $69 million. Contractual cash obligations totaled $595.0 million, including operating leases, purchase obligations and construction, equipment and technology commitments.
Changes, outlook, risks and unusual items
- Operating cash flow increased $135.9 million for the first nine months, primarily due to working-capital changes. Accounts receivable movements contributed positively, while accounts payable and accrued expenses and contract liabilities were uses of cash.
- Q3 effective tax rate rose to 24.9% from 21.8%; the 2018 quarter benefited from discrete tax adjustments, including foreign tax credits and a state tax refund. Nine-month rates were 25.6% versus 26.1%.
- Revenue and related expense presentation changes in 2019 shifted certain freight revenue and costs to destination services and changed certain import services from net to gross presentation. The filing says the effects on reported revenue and expenses were immaterial and operating income was unchanged; prior-year segment revenue was not recast.
- The company adopted the lease accounting standard on January 1, 2019, recording $343 million in right-of-use assets and $340 million in lease liabilities at adoption, with no retained-earnings impact. Nine-month operating lease cost was $60.8 million and variable lease cost $19.9 million.
- No formal earnings or revenue guidance is provided. Management expects pricing volatility to continue as customers respond to trade policies and carriers adjust capacity and pricing. New marine-fuel sulfur rules effective in 2020 could raise carrier costs and potentially reduce operating income. The filing also highlights uncertainty from U.S.-China tariffs and negotiations, Brexit, weaker global trade, currency movements, carrier financial stability and competitive pricing pressure.
- Management reported ordinary-course legal claims and investigations, with no expected significant effect and no material accrued amounts; additional reasonably possible losses could not be estimated. No material changes to previously disclosed risk factors were reported. Disclosure controls were judged effective at a reasonable-assurance level; a worldwide accounting-system implementation is ongoing.
Key facts for investors to verify
- Whether airfreight volume and rate pressures persist, and whether customs brokerage growth offsets them.
- How reported revenue trends compare after considering the 2019 gross-versus-net and destination-service presentation changes.
- Whether the improvement in operating cash flow is sustained as working capital fluctuates seasonally.
- The effect of trade policy, carrier capacity and 2020 marine-fuel requirements on shipment volumes, buy rates and margins.
- Progress and control implications of the multiyear accounting-system implementation, alongside lease obligations and planned capital spending.