Expeditors International of Washington, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone Q4 filing; quarterly results are also summarized below. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Expeditors is a non-asset-based global logistics provider. It arranges air and ocean freight, customs brokerage, warehousing, distribution, and related services, relying on third-party carriers rather than owning aircraft or ships. The company operated in 63 countries and had 15,397 employees at year-end.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $6,616.6 million | $6,564.7 million | +0.8% |
| Net revenue (non-GAAP) | $2,187.8 million | $1,981.4 million | +10.4% |
| Operating income | $721.5 million | $594.6 million | +21.3% |
| Net earnings attributable to shareholders | $457.2 million | $376.9 million | +21.3% |
| Diluted EPS | $2.40 | $1.92 | +25.0% |
| Operating income / net revenue | 33% | 30% | +3 percentage points |
Net revenue is revenue less directly related operating expenses, a company-defined non-GAAP measure used to assess service economics. Net earnings attributable to shareholders were 21% of net revenue in 2015, versus 19% in 2014. The effective tax rate declined to 37.6% from 37.9%.
- Airfreight: Net revenue rose 11% to $752.9 million; tonnage increased 6% and net revenue per kilo rose 9%. Revenue fell 1%, primarily as average sell rates declined.
- Ocean freight and services: Net revenue increased 18% to $545.0 million. Consolidation net revenue grew 31%, principally from a 27% improvement in net revenue per container and 3% volume growth, aided by favorable carrier buying opportunities.
- Customs brokerage and other: Net revenue grew 6% to $889.9 million, primarily on higher customer volumes. This category supplied 41% of company net revenue.
- Costs: Salaries and related costs rose 7%, driven by higher bonuses and headcount, but declined as a share of net revenue from 54% to 52%. Bonuses to field and executive management were up 18%.
Cash flow and liquidity: Operating cash flow was $564.7 million, up from $395.0 million in 2014. Year-end cash and cash equivalents plus short-term investments totaled $807.8 million; working capital was $1,132.0 million. The company reported no long-term debt and said available cash and operating cash flow should meet foreseeable liquidity needs. Capital expenditures were $44.4 million in 2015; management estimated 2016 capital expenditures of $100 million, including real estate development.
Capital returns: The company repurchased $630.0 million of shares in 2015 and paid $135.7 million in dividends, or $0.72 per share, compared with $0.64 in 2014. Weighted-average diluted shares fell to 190.2 million from 196.8 million.
Q4 and material changes
In Q4 2015, revenue was $1,596.2 million, net revenue $536.2 million, net earnings attributable to shareholders $114.4 million, and diluted EPS $0.61. Compared with Q4 2014, revenue declined about 9.8%, while net revenue increased about 3.3%, shareholder earnings about 15.2%, and diluted EPS increased from $0.51. Q4 2015 net earnings included a $6 million recovery of legal and related fees.
For the year, modest revenue growth contrasted with substantially stronger net revenue and earnings. Lower transportation buying costs and improved yields—particularly in ocean freight—supported the improvement. Foreign currency translation contributed to a $44.1 million other comprehensive loss, and year-end shareholders’ equity decreased to $1,692.0 million from $1,868.4 million.
Outlook, risks and other notable items
- No company financial forecast or EPS guidance was provided; management states it does not issue financial forecasts or confirm analysts’ projections. Management expects competitive pricing conditions to continue and ocean pricing volatility could pressure yields.
- Management expects global airfreight to remain affected by carrier capacity, fuel costs, and product-launch timing. It does not expect changes in fuel prices to adversely affect net revenue, although gross revenue and costs may change with carrier rates.
- Key risks include dependence on financially leveraged airlines and ocean carriers, carrier capacity and schedule changes, intense competition, fluctuations in global trade and customer demand, foreign currency exposure, regulatory and security requirements, technology upgrades, and cybersecurity or network disruption.
- A hypothetical 10% weakening of the U.S. dollar over 2015 would have raised operating income by about $54 million; a 10% strengthening would have reduced it by about $44 million. The company had no foreign currency derivatives outstanding at year-end.
- Standby letters of credit and guarantees totaled approximately $75.8 million. Contractual cash obligations totaled $228.1 million, including $130.8 million of operating leases and $69.9 million of unconditional carrier-space purchase obligations.
- Ordinary-course legal matters were not expected by management to have a significant effect; recorded accruals were not significant, and additional possible losses could not be estimated. The financial statements and internal control over financial reporting received unqualified auditor opinions.
- Management identified no material off-balance-sheet arrangements. A worldwide accounting-system implementation is underway; the filing notes the transition requires testing and could pose operational or control risks. The company was also upgrading systems for U.S. customs’ ACE requirements, with potential for delays or disruption.
Important facts for investors to verify
- Confirm the sustainability of 2015’s ocean-freight yield gains and favorable carrier buying conditions, given management’s warning of continuing pricing volatility.
- Track freight volumes, sell rates, and net revenue per unit across air, ocean, and customs services; reported gross revenue alone can obscure changes in underlying margins.
- Review the expected $100 million of 2016 capital expenditures and the impact of ongoing technology and accounting-system transitions.
- Monitor the substantial share repurchases and dividends against operating cash flow, liquidity needs, and the company’s $75.8 million in guarantees and letters of credit.
- Assess exposure to foreign exchange, carrier financial health and capacity, regulatory changes, cybersecurity, and customer or global-trade weakness.