Expeditors International of Washington, Inc. — Q3 2018 Form 10-Q
Business context and period. Expeditors is a non-asset-based global logistics provider. This filing reports the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,090.9 | $1,802.2 | $5,902.8 | $5,019.6 |
| Net revenue (non-GAAP) | $661.3 | $599.1 | $1,939.7 | $1,690.4 |
| Operating income | $203.2 | $186.9 | $579.6 | $501.2 |
| Net earnings attributable to shareholders | $162.7 | $120.3 | $439.0 | $322.4 |
| Diluted EPS | $0.92 | $0.66 | $2.46 | $1.77 |
| Operating income as % of net revenue | 30.7% | 31.2% | 29.9% | 29.7% |
| Operating cash flow | $86.7 | $85.4 | $470.8 | $362.3 |
- Q3 revenue rose 16%, net revenue 10%, operating income 9%, and diluted EPS 39% year over year. For the first nine months, revenue increased 18%, net revenue 15%, operating income 16%, and diluted EPS 39%.
- Q3 airfreight net revenue increased 13%; ocean freight and services net revenue decreased 1%; customs brokerage and other services net revenue increased 15%. Nine-month changes were +20%, +3%, and +17%, respectively.
- The reported effective tax rate declined to 21.8% in Q3 and 26.1% for the nine months, from 36.7% and 37.1% in 2017.
Cash, liquidity, and capital
- At September 30, cash and cash equivalents were $990.6 million, working capital was $1.369 billion, and the company reported no long-term debt. Management said cash and operating cash flow should cover requirements for at least the next 12 months and the foreseeable future.
- Nine-month capital expenditures were $37.6 million, versus $67.6 million a year earlier; the company estimated full-year 2018 capital expenditures of $55 million.
- Nine-month share repurchases were $555.8 million, compared with $340.7 million in 2017. Dividends paid were $79.2 million, or $0.45 per share, versus $75.7 million, or $0.42 per share. A further $0.45-per-share dividend was declared after quarter-end.
- Contractual cash obligations totaled $443.7 million, including $294.1 million of operating lease commitments and $90.2 million of unconditional purchase obligations. Standby letters of credit and guarantees totaled $71 million.
Changes, outlook, and risks
- Revenue accounting: Topic 606 was adopted January 1, 2018 using the modified retrospective method. It produced a $22 million reduction to opening retained earnings and recorded deferred contract costs and contract liabilities. Prior-year results were not restated. Separately, certain warehouse and distribution revenue moved from net to gross presentation, increasing both revenue and operating expense by about $50 million in each of the first three quarters of 2018; this boosts reported revenue without a corresponding increase in net revenue.
- Drivers and margins: Management attributed growth to higher freight volumes and rates, including increased airfreight tonnage and ocean container volume. Ocean consolidation margins faced pressure: Q3 net revenue per container fell 19%, partly offset by 8% volume growth. Higher carrier buy rates, fuel costs, competitive pricing, and capacity constraints may affect yields and margins.
- Outlook: No earnings or revenue guidance was provided. Management expects pricing volatility and competitive conditions to continue and described global trade and economic conditions as uncertain. The business is typically seasonally stronger in the third and fourth quarters, but management cautioned that historical patterns may not recur.
- Tax and other unusual items: The lower 2018 tax rate reflected the U.S. tax-law rate reduction, share-based compensation deductions, foreign tax credits, and a $4 million state tax refund; certain tax-law calculations remained provisional. A $2 million estimated BEAT expense recorded in Q2 was reversed in Q3. 2017 overhead comparisons included an $8 million recovery of legal costs and a $6 million favorable indirect-tax contingency resolution.
- Risks and contingencies: Key exposures include changes to tariffs and trade policies, weaker trade or customer demand, carrier financial health and capacity, fuel and foreign-exchange volatility, competition, and service disruptions. A hypothetical 10% U.S. dollar weakening or strengthening was estimated to raise operating income by about $42 million or reduce it by about $34 million, respectively, before behavioral effects. Ordinary-course legal matters were not expected by management to have a significant effect; possible additional losses could not be estimated.
- The company expected to adopt lease accounting in 2019; undiscounted operating lease payments were approximately $294 million. Management also noted that accounting-system and standards changes require process and internal-control testing. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of reported revenue growth reflects the gross presentation change, and how do net revenue and service-level yields trend excluding that effect?
- Whether airfreight growth and pricing can offset ocean consolidation yield pressure, higher carrier costs, and competitive rate reductions.
- Whether the reduced tax rate is sustainable after provisional tax-law items and discrete tax benefits are finalized.
- Whether working-capital demands, repurchases, lease commitments, and other obligations remain consistent with management’s liquidity assessment.
- How trade-policy changes, carrier capacity and stability, fuel prices, and currency movements affect volumes, margins, and cash flow.