Expeditors International of Washington, Inc. — 2019 Form 10-K
Business and period: Global, non-asset-based logistics provider for air and ocean freight, customs brokerage and related services. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below compare Q4 2019 with Q4 2018.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $8.175 billion | $8.138 billion | +0.5% |
| Operating income | $766.7 million | $796.6 million | -3.8% |
| Operating margin | 9.4% | 9.8% | -0.4 percentage points |
| Net earnings attributable to shareholders | $590.4 million | $618.2 million | -4.5% |
| Diluted EPS | $3.39 | $3.48 | -2.6% |
| Operating cash flow | $771.9 million | $572.8 million | +$199.1 million |
Net margin was 7.2%, versus 7.6% in 2018. Cash and cash equivalents were $1.230 billion, working capital was $1.602 billion, and the company reported no long-term debt. Current assets were $2.770 billion against current liabilities of $1.168 billion. Operating cash flow rose mainly because accounts receivable declined, partly offset by lower earnings. Capital expenditures were $47.0 million; management estimated approximately $50 million for 2020.
At year-end, operating lease liabilities totaled $391.7 million. Contractual cash obligations were $563.6 million, including $467.2 million for operating leases. Standby letters of credit and guarantees totaled $69.5 million. Dividends paid were $1.00 per share, up from $0.90; the company repurchased $389.1 million of shares.
Material changes and quarterly results
- Airfreight revenue fell 10%, primarily as sell rates declined 9% and tonnage declined 6%. Ocean freight and ocean services revenue decreased 2%; customs brokerage and other services revenue increased 16%, supported by brokerage and time-definite road freight demand.
- Operating income declined despite slightly higher reported revenue. Management cited weaker freight demand, trade disputes and lower airfreight rates. Salaries and related costs increased 2%; total overhead rose 3%.
- Q4 revenue was $2.045 billion, down 8.5% year over year; operating income was $180.3 million, down 16.9%; shareholder earnings were $137.3 million, down 23.4%; diluted EPS was $0.79 versus $1.02.
- China, including Hong Kong, contributed 26% of full-year revenue and 27% of operating income. Management attributed weaker Q4 results in part to slowing China trade and related global freight movement.
Reported service mix and expenses were affected by changes in presentation: certain destination services shifted between service categories, and certain import services were presented gross rather than net. The filing says these changes increased reported revenue and directly related expenses without changing operating income; prior-year figures were not revised.
Outlook, risks and unusual items
- The company did not provide a financial forecast and states it has a policy against issuing financial projections. It expects continued pricing volatility and competitive pressure; carrier capacity, rate changes and demand may affect margins.
- The filing identifies the emerging COVID-19 outbreak in China as a risk to 2020 operations, citing office and factory closures, port restrictions, flight cancellations, shipment delays and reduced airfreight capacity. It warns that prolonged disruption could reduce shipments and affect results; the impact was not quantified.
- Other key risks include global trade and tariff uncertainty, economic weakness, dependence on third-party carriers, foreign exchange exposure, cybersecurity and systems continuity, regulatory compliance, and customer credit. A hypothetical 10% U.S. dollar weakening would have increased 2019 operating income by about $51 million; a 10% strengthening would have reduced it by about $41 million.
- The effective tax rate increased to 25.6% from 24.3%. The company noted continuing tax audits and uncertainty around potential assessments; KPMG identified assessment of gross unrecognized tax benefits as a critical audit matter.
- Accounting changes included adoption of lease accounting in 2019, which added $343 million of operating lease right-of-use assets and $340 million of lease liabilities at adoption. The company also reported changes in revenue presentation. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
- Ordinary-course legal matters were not expected by management to have a significant effect; recorded amounts were not significant, and additional possible losses could not be estimated.
Investor facts to verify
- Whether China-related disruption and broader trade conditions materially affected subsequent operating results and freight volumes.
- Underlying service profitability and volume trends, especially the divergence between declining air and ocean activity and growth in customs brokerage and other services.
- Comparability of reported revenue and expense trends given the 2019 gross/net and destination-service presentation changes.
- Cash generation, working-capital movements, share repurchases and the company’s ability to meet lease and other contractual commitments.
- Potential outcomes of tax audits and the company’s exposure to carrier rate volatility, currency movements and cybersecurity or systems disruptions.