Expeditors cuts costs to mitigate falling revenues and remains in a strong cash position

The first-quarter headline figures of the Seattle-based 3PL, Expeditors International, were not pretty. Reported revenues in the three months ending 31 March plunged 15% to $1.4bn, with net revenues down 2% year-on-year to $517m.

However, good cost management mitigated the negative impact of falling sales on the company’s operating performance both in the air freight division, its main revenue driver, and in the ocean freight unit. Their combined total sales totalled around $1bn in the first quarter.

Operating income at group level was 10% lower at $151m, while net earnings and diluted earnings per share (EPS) also came under pressure, down 9% and 4% respectively. Notably, EPS would have been five percentage points lower had Expeditors not reduced its share count to 183m shares outstanding from 192m in the first quarter, when it spent $70m on buybacks against $77m in the prior year.

The air freight services unit saw revenues fall 21% to $560m from $707m, which was more than offset by a 24% drop in operating costs, down from $513m to $388m. Ocean freight and ocean services also experienced a 20% drop in revenues to $454m, but quarterly costs were down almost 28% year-on-year.

Revenues and costs in customs brokerage and other services business, which turned over $403m, were essentially unchanged year-on-year.

Salaries and related costs are on the increase, with the employee headcount at 15,518 at the end of March, up from 14,882 in March 2015.

Expeditors has cash to invest given its gross cash and cash equivalents position, which rose to $1bn from $800m at the end of December.

Lower group earnings did not harm the company’s cash flow profile because it is properly managing working capital – account receivables dropped by over $100m, positively contributing to a rise in net cash flow from operations to $235m from $135m one year earlier.

Despite weak comparable revenues and earnings figures, which were expected, this cash-rich freight forwarder has the financial wherewithal to cope with soft market conditions. Given its capex requirements, and a projected normalised $600-700m free cash flow in 2016, Expeditors boasts a forward free cash flow yield of between 7% and 8%, which gives it plenty of flexibility with regard to its dividend policy and financing options.

Chief executive Jeffrey S. Musser said, “We knew that comparing our 2016 results to our record year in 2015 would be challenging, especially when considering the current headwinds from slowing global trade.”

He added that business drivers in Q1 2015 “were quite different from those in Q1 2016”, given that during the first quarter this year Expeditors worked with “carriers to adjust pricing in over-supplied air and ocean markets to maintain and grow profitable market share”.

Source: Transport Intelligence, 18th May 2016

Author: Alessandro Pasetti