Expeditors International of Washington(EXPD) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements For the first quarter of 2023, Expeditors reported a significant year-over-year decline in financial performance, with total revenues dropping to $2.59 billion from $4.66 billion and net earnings attributable to shareholders decreasing to $226 million from $346 million, primarily driven by falling rates and volumes in air and ocean freight Condensed Consolidated Statements of Earnings (Q1 2023 vs Q1 2022) | Financial Metric | Q1 2023 (In thousands) | Q1 2022 (In thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,592,589 | $4,664,298 | -44.4% | | Airfreight services revenues | $904,903 | $1,598,555 | -43.4% | | Ocean freight and ocean services revenues | $697,307 | $1,976,246 | -64.7% | | Operating Income | $275,969 | $461,760 | -40.2% | | Net Earnings Attributable to Shareholders | $226,011 | $346,109 | -34.7% | | Diluted EPS | $1.45 | $2.05 | -29.3% | Condensed Consolidated Balance Sheet Highlights | Balance Sheet Item | March 31, 2023 (In thousands) | December 31, 2022 (In thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $2,350,794 | $2,034,131 | | Total current assets | $4,257,011 | $4,518,017 | | Total assets | $5,332,577 | $5,590,434 | | Total current liabilities | $1,760,056 | $2,054,055 | | Total equity | $3,150,368 | $3,113,535 | Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three months ended March 31, 2023 (In thousands) | Three months ended March 31, 2022 (In thousands) | | :--- | :--- | :--- | | Net cash from operating activities | $546,412 | $413,946 | | Net cash from investing activities | ($9,551) | ($14,333) | | Net cash from financing activities | ($226,566) | $17,759 | - In Q1 2023, the company repurchased 1,959 thousand shares at an average price of $108.98 per share No shares were repurchased in the same period in 2022[39] - The company incurred cumulative additional expenses of $60 million, net of recoveries, as a result of the 2022 cyber-attack In Q1 2022, this included approximately $42 million in incremental demurrage charges and $20 million in other costs[48][49] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the significant downturn in Q1 2023 performance to a global economic slowdown, high customer inventory levels, and the normalization of freight rates from pandemic-era highs, while maintaining a strong liquidity position and continuing its share repurchase program - Key operational highlights for Q1 2023 include lower volumes due to softening customer demand, declining average buy and sell rates as capacity exceeded demand, and a 35% decrease in net earnings to shareholders[61] - The global economic environment remains uncertain due to potential impacts of pandemics, inflation, rising interest rates, and the conflict in Ukraine A slowdown in the global economy and softening customer demand began in Q2 2022 and continued through Q1 2023[63] Results of Operations Operating income fell 40% to $276.0 million in Q1 2023 from $461.8 million in Q1 2022, driven by sharp revenue declines in Airfreight (-43%) and Ocean freight (-65%) due to falling rates and volumes Comparison of Operations (Q1 2023 vs Q1 2022) | (in thousands) | Q1 2023 | Q1 2022 | Percentage change | | :--- | :--- | :--- | :--- | | Airfreight services revenues | $904,903 | $1,598,555 | (43)% | | Ocean freight services revenues | $697,307 | $1,976,246 | (65)% | | Customs brokerage revenues | $990,379 | $1,089,497 | (9)% | | Operating income | $275,969 | $461,760 | (40)% | | Net earnings attributable to shareholders | $226,011 | $346,109 | (35)% | - Airfreight revenues and expenses decreased by 43% and 42% respectively, driven by a 44% decrease in average sell rates and a 6% decrease in tonnage as market rates declined and demand softened[70] - Ocean freight revenues and expenses fell 65% and 70% respectively, primarily due to a 62% drop in average sell rates and a 26% decrease in containers shipped as demand softened and port congestion eased[72][73] - Customs brokerage expenses decreased 26% YoY, largely because Q1 2022 included approximately $42 million in incremental demurrage charges resulting from the cyber-attack[77][78] - Salaries and related costs decreased 17% due to lower commissions and bonuses, reflecting the decline in operating income Management bonuses decreased by 45% compared to the same period in 2022[81][83] Liquidity and Capital Resources The company's liquidity remains strong, with working capital of $2.5 billion, including $2.35 billion in cash and cash equivalents as of March 31, 2023, and net cash from operations increased to $546 million from $414 million in the prior year - As of March 31, 2023, the company had working capital of $2,497 million, including cash and cash equivalents of $2,351 million, and no long-term debt[90] - Net cash provided by operating activities increased by $132 million YoY to $546 million, primarily due to the collection of accounts receivable[90] - During Q1 2023, the company used $227 million in financing activities, which included the repurchase of 2.0 million shares of common stock[94] - Total anticipated capital expenditures for 2023 are estimated to be $100 million, covering routine expenditures, improvements, and technology investments[93] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange and interest rate fluctuations, with a hypothetical 10% weakening of the U.S. dollar in Q1 2023 increasing operating income by approximately $16 million, and no derivative financial instruments used to manage this risk - A hypothetical 10% weakening of the U.S. dollar during Q1 2023 would have increased operating income by approximately $16 million[100] - A hypothetical 10% strengthening of the U.S. dollar during Q1 2023 would have reduced operating income by approximately $13 million[100] - The company does not currently use derivative financial instruments to manage foreign currency risk Net foreign currency losses were approximately $3 million in Q1 2023, compared to $2 million in net gains in Q1 2022[101][87] - Interest rate risk is low, as the company had no long-term debt at March 31, 2023 A hypothetical 10 basis point change in interest rates would not significantly impact earnings[102] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2023, due to a material weakness in IT program change management, with remediation expected by year-end - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective as of the end of the reporting period[103] - The ineffectiveness is due to a material weakness in internal control over financial reporting related to IT program change management, as disclosed in the 2022 Annual Report[103] - The company is implementing enhancements to strengthen IT processes and expects the remediation of this material weakness to be completed prior to the end of 2023[104] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various claims, lawsuits, and investigations in the ordinary course of business, none of which are expected to significantly affect operations, cash flows, or financial position - In management's opinion, based on advice from legal and tax advisors, none of the current legal matters are expected to have a significant effect on the Company's operations, cash flows or financial position[108] Risk Factors There have been no material changes to the company's risk factors from the 2022 Form 10-K, except for an update emphasizing the impact of global economic uncertainty, which could lead to lower freight volumes, reduced sell rates, and higher operating expenses - A key risk factor is that unfavorable economic conditions, rising interest rates, and high inflation could result in lower freight volumes, reduced sell rates, and higher operating expenses, which may adversely affect revenues, operating results, and cash flows[109] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2023, the company repurchased 1,959 thousand shares of its common stock at an average price of $108.98 per share under the Discretionary Stock Repurchase Plan, amended on February 20, 2023, to authorize repurchases down to 140 million shares outstanding Issuer Purchases of Equity Securities (Q1 2023) | Period | Total number of shares purchased (in thousands) | Average price paid per share | | :--- | :--- | :--- | | Jan 1-31, 2023 | - | - | | Feb 1-28, 2023 | - | - | | Mar 1-31, 2023 | 1,959 | $108.98 | | Total | 1,959 | $108.98 | - On February 20, 2023, the Board of Directors authorized repurchases of common stock down to 140 million shares This authorization has no expiration date[112]