Expeditors International of Washington, Inc. — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone Q4 filing. Expeditors is a non-asset-based global logistics provider of air and ocean freight, customs brokerage, and related services. It relies on third-party carriers and does not own aircraft or ships. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. “Net revenues” is a company-defined non-GAAP measure: revenues less directly related service expenses.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $6,564.7 | $6,080.3 | +8.0% |
| Net revenues | $1,981.4 | $1,882.9 | +5.2% |
| Operating income | $594.6 | $552.1 | +7.7% |
| Operating income / net revenues | 30.0% | 29.3% | +0.7 percentage points |
| Net earnings attributable to shareholders | $376.9 | $348.5 | +8.1% |
| Diluted EPS | $1.92 | $1.68 | +14.3% |
| Cash from operations | $395.0 | $407.5 | −3.1% |
| Cash, cash equivalents and short-term investments at year-end | $967.4 | $1,274.0 | −24.1% |
| Working capital at year-end | $1,305.5 | $1,545.1 | −15.5% |
- Service net revenues: airfreight $677.1 million (+6%); ocean freight and ocean services $461.6 million (+6%); customs brokerage and other services $842.8 million (+4%).
- Airfreight tonnage rose 9%, while net revenue per kilo fell 3%. Ocean container volume rose 11%; net revenue per container declined in ocean consolidation, principally reflecting lower sell rates. Customs brokerage and other service costs grew faster than revenues, reducing the margin percentage.
- Cash from operations declined mainly because of working-capital movements, including a $206.9 million increase in accounts receivable, partly offset by higher earnings. Investing activities used $78.9 million, including $37.5 million of capital expenditures and a $27.1 million escrow deposit for a prospective land acquisition.
- The company had no debt at year-end. Management said cash and operating cash flow should meet capital and liquidity needs for at least the next 12 months and the foreseeable future. 2015 capital expenditures were estimated at $85 million.
- Financing activities used $605.5 million, including $550.8 million of share repurchases and $124.6 million of dividends, partly offset by proceeds from share issuance. Shares outstanding fell to 191.7 million from 202.6 million; dividends paid per share increased to $0.64 from $0.60.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by ocean services (+11% revenue) and customs brokerage and other services (+8%); total net revenue grew more slowly than total revenue.
- Operating income and shareholder earnings increased, and the operating-income-to-net-revenue ratio improved. The effective tax rate decreased to 37.9% from 38.9%.
- Operating cash flow fell by $12.6 million, while year-end cash and short-term investments declined by $306.5 million. Higher repurchases were a significant use of cash: the company repurchased 13.1 million shares under its plans in 2014, versus 6.1 million in 2013.
- Foreign currency translation contributed to a $32.0 million other comprehensive loss in 2014. The company reported net foreign currency losses of approximately $3.8 million.
Outlook, management commentary, risks and unusual items
- The company does not issue financial forecasts or projections. Its 2015 capital expenditure estimate is $85 million. Strategic priorities include defending and growing core services, expanding North American market share, strengthening cross-region alignment, and developing Asian import and selected trade-lane capabilities.
- Management reported continued competitive pressure on pricing and unit margins in 2014 and expected competitive conditions to continue. Lower oil prices had not significantly affected freight buy and sell rates in 2014; customers began seeking lower rates in 2015. Management expected persistent lower fuel prices to reduce gross revenues and costs, but did not expect an adverse effect on net revenues; carrier pricing effects remained uncertain.
- Key business risks include dependence on financially leveraged carriers and available capacity, freight-volume and pricing volatility, intense competition, foreign-exchange exposure, international trade and regulatory changes, and unpredictable customer demand. A 10% average weakening of the U.S. dollar was estimated to raise operating income by about $42 million; a 10% strengthening was estimated to reduce it by about $35 million, before any changes in shipping patterns.
- The company was beginning a multiyear global accounting-system upgrade. Management identified implementation and operational disruption risks, while stating that controls were effective at year-end. Management and KPMG reported effective internal control over financial reporting; KPMG gave unqualified opinions on the financial statements and controls.
- Ordinary-course legal claims, lawsuits and investigations were not expected by management to have a significant effect; recorded accruals were not significant, and possible additional losses could not be estimated. Standby letters of credit and guarantees totaled approximately $73.9 million, mainly supporting foreign subsidiaries’ carrier and customs-related obligations. Contractual cash obligations totaled $185.8 million, including operating leases and purchase commitments.
- Q4 2013 included an $8 million retirement-bonus expense for former CEO Peter Rose. CEO Jeffrey Musser succeeded Rose effective March 1, 2014; the filing also noted senior-management succession and a planned executive retirement.
Most important facts for investors to verify
- Reconcile and consistently interpret the company’s non-GAAP net-revenue measure against GAAP revenue and directly related expenses.
- Review the working-capital and receivables increase, cash-flow trend, and whether the $85 million 2015 capital-spending estimate and planned land development affect liquidity.
- Assess the scale and pace of share repurchases and dividends relative to operating cash generation and the reduced cash balance.
- Track freight volumes, buy/sell-rate spreads, carrier capacity and financial health, and whether lower fuel costs or competitive pricing pressure affect net revenues.
- Monitor the accounting-system implementation, currency exposure, and any developments in legal, tax, regulatory or other contingencies.