During this year’s third quarter, net income was up 35.2% year-over-year to $163 million, as net revenue increased 10.4% to $661 million. Operating income for the quarter was up 8.7% to $203 million.
While volumes and business were up across the company’s operating segments, the substantial y-o-y increase in net income is largely attributed to accounting changes. Senior Vice President and CFO Bradley S. Powell noted that the company’s effective tax rate for the three months was 21.8%, compared to 36.7% during the same three months in 2017. The effective tax rate in the most recent quarter benefited from certain discrete adjustments as a result of recent interpretations related to the 2017 Tax Act. Powell emphasized, however, that Expeditors’ effective tax rate in future periods will largely depend on the mix of pretax earnings that are generated in the US versus foreign operations, further interpretation and guidance to be issued on the new tax law, and discrete items that occur in the reporting periods.
All three of the company’s business units performed well overall.
- Air freight volume in the quarter increased by a slight 1%. Tight capacity on many lanes allowed airlines to increase prices, which drove a 13.4% increase in Expeditors’ gross air freight revenue to $833 million. Third quarter net revenue from air freight activities also rose 13.4% to $212 million. Air freight operating margin during the quarter was 13.3%.
- Ocean freight volume was up 8%, and gross revenue from ocean freight forwarding rose 4.0% in the quarter to $586 million. Imbalance in supply and demand mixed with volatile rates challenged net revenue, which dipped slightly by 1.2% to $150 million. Ocean freight operating margin was 5.9%.
- Customs brokerage has long been Expeditors’ most profitable division, and the third quarter of 2018 was no exception. Gross revenue was up an impressive 33.4% to $671 million, and net revenue rose 15% to $298 million. Operating margin from customs brokerage and related activities in the quarter was high at 53%, largely related to the company’s adoption of new revenue recognition guidance and change of revenue presentation. The new revenue recognition resulted in a $22 million net reduction to the opening balance of retained earnings. The company also changed the presentation of certain warehouse and distribution revenues from a net to gross basis, which increased both revenues and operating expenses in customs brokerage and other services by approximately $50 million in each of the three quarters of 2018.
Overall, despite uncertainty surrounding potential trade conflicts, Expeditors performed well and reported a third-quarter operating margin of 30.7%, and a net margin of 24.7%.