Expeditors Reports a Weak Q2

Expeditors International of Washington Inc.’s ( EXPD - Analyst Report ) quarterly performance lacked luster yet again. The company reported second quarter 2012 adjusted earnings of 39 cents per share that missed the Zacks Consensus Estimate of 43 cents and deteriorated 11% from 44 cents earned in the year-ago quarter. Weak revenues from air and ocean freight segments were primarily responsible for the underperformance.

Net income attributable to shareholders declined 12% year over year to $84 million in the reported quarter.

Total revenue decreased 5% year over year to $1.5 billion, and missed the Zacks Consensus Estimate of $1.6 billion. The decline in revenue was primarily due to lower shipments from air freight given poor global demand and lack of projects.

On a year-over-year basis, second quarter revenues from Other North America increased 3.3%. Revenues from the United States, Latin America, Asia Pacific, Europe and Africa, as well as Middle East and India declined 3.6%, 0.8%, 4.2%, 12.1% and 4.8%, respectively.

Quarterly gross profit (net revenue) dropped 4% year over year to $453.7 million, resulting in gross margin (yield) of 30.1%, up from 29.9% in the year-ago quarter.

Operating income declined 13% year over year to $132.4 million and operating expenses also fell 4% year over year to $1.37 billion in the reported quarter.

Revenue Segments

Airfreight Services revenue fell 14.8% year over year to $638.5 million in the second quarter.

Ocean Freight and Ocean Services revenue dropped 6.6% year over year to $519 million.

Customs Brokerage and Other Services revenues inched up 0.8% year over year to $347.4 million.

Liquidity

Expeditors’ exited the second quarter with operating cash flows of $92.8 million compared with $78.1 million at the end of the year-ago quarter. Cash and cash equivalents at the end of the second quarter was $1.4 billion, up from $1.2 billion in the same period a year ago.

Our Analysis

We remain concerned about the uncertainty over the ocean freight businesses that are likely to restrict volume growth and affect near-term profitability for Expeditors. Further, we also expect a negative impact on the company’s margins by freight rate increases by third party carriers. Additionally, competitive threats from peers like CH Robinson Worldwide Inc. ( CHRW - Analyst Report ) as well as dependence on asset-based transportation providers contribute to our negative stance on the company.

We are currently maintaining our long-term Underperform recommendation on Expeditors International. For the short-term (1-3 months) the company retains a Zacks #3 Rank (Hold).