Expeditors International of Washington, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Amounts below are in U.S. dollars.
Business context and reporting period
Expeditors is a non-asset-based global logistics provider. It arranges air and ocean freight, customs brokerage, and related services, relying on third-party carriers rather than owning aircraft or ships. It operated through approximately 177 district offices and employed about 16,000 people. No customer accounted for 5% or more of net revenues.
Management uses net revenues—revenues less directly related operating expenses—as a non-GAAP measure of service performance. This measure is useful alongside reported revenue because freight revenue can include pass-through carrier charges.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $6.098 billion | $6.617 billion |
| Net revenues (non-GAAP) | $2.164 billion | $2.188 billion |
| Operating income | $670.2 million | $721.5 million |
| Net earnings attributable to shareholders | $430.8 million | $457.2 million |
| Diluted EPS | $2.36 | $2.40 |
| Operating cash flow | $529.1 million | $564.7 million |
- Revenue declined about 8%, while net revenues declined about 1%. Operating income fell about 7% and shareholder earnings about 6%. Operating income was 31% of net revenues, compared with 33% in 2015; shareholder earnings were 20% of net revenues, versus 21%.
- Airfreight net revenues fell 7% to $701.2 million; ocean freight net revenues fell 1% to $538.8 million; customs brokerage and other net revenues rose 4% to $924.1 million.
- Cash and cash equivalents were $974.4 million; working capital was $1.289 billion; total assets were $2.791 billion; shareholders’ equity was $1.845 billion. The company reported no long-term debt.
- Capital expenditures were $59.3 million. Cash used for share repurchases was $337.7 million and dividends paid were $145.1 million ($0.80 per share). Shares outstanding at year-end were 179.9 million, down from 182.1 million.
- Fourth-quarter 2016 revenue was $1.642 billion, net revenues $548.6 million, shareholder earnings $110.6 million and diluted EPS $0.61. Fourth-quarter 2015 diluted EPS was also $0.61.
Material changes versus the prior comparable period
- Lower freight sell rates amid competitive conditions drove much of the annual revenue decline. Airfreight tonnage grew 3%, but net revenue per kilo fell 12%; ocean container volumes rose 3%, while net revenue per container fell 8%.
- Carrier overcapacity generally reduced buy rates, but favorable buying opportunities did not fully offset lower yields. A large ocean carrier’s August 2016 bankruptcy contributed to a spike in ocean buy rates late in the third quarter.
- Customs brokerage and other services benefited from higher road-freight volumes, lifting net revenues 4%. Order-management net revenues increased 11%.
- Overhead expenses rose to 69% of net revenues from 67%. Salaries and related costs increased 1%, and other overhead increased 4%, including higher rent, maintenance and technology costs.
- Operating cash flow decreased $35.6 million, primarily due to lower earnings and working-capital changes. Cash nevertheless increased to $974.4 million by year-end.
Outlook, risks, contingencies and unusual items
- The company does not issue financial forecasts or confirm analyst projections. It expects competitive and operating pressures to continue, including customer price pressure, carrier pricing volatility, uncertain freight demand and shifting carrier capacity. No specific earnings or revenue guidance is provided.
- Management estimated 2017 capital expenditures at $110 million, including a planned European building project expected to cost $51 million. The company also anticipated additional spending in 2018 related to that development.
- Key risks include dependence on financially challenged air and ocean carriers; international trade and economic uncertainty; foreign-exchange exposure; intense competition; regulatory and security compliance; cybersecurity and systems continuity; and the ability to retain key personnel. The company cited ocean-carrier overcapacity, consolidation and the 2016 carrier bankruptcy as industry concerns.
- At December 31, 2016, standby letters of credit and guarantees totaled approximately $64.0 million. Contractual cash obligations totaled $366.9 million, including $214.3 million of operating leases and $76.3 million of unconditional purchase obligations. Management said these obligations were expected to be met in the ordinary course.
- Management said ordinary-course legal claims, investigations and lawsuits were not expected to have a significant effect; recorded accruals were not significant. It could not estimate additional reasonably possible losses, if any.
- Fourth-quarter 2016 earnings included a $6 million foreign-exchange gain in customs brokerage and other services expenses following devaluation of the Egyptian pound. The company reported no foreign-currency derivatives outstanding at year-end.
- Accounting changes ahead include adoption of stock-compensation guidance in 2017, which management expects could make the effective tax rate and diluted EPS more volatile; revenue-recognition guidance in 2018, whose full impact was still under review; and lease accounting in 2019, which will put lease assets and liabilities on the balance sheet.
Important facts for investors to verify
- Reconcile the non-GAAP net-revenue measure to reported revenue and assess whether yield pressure is stabilizing across air and ocean services.
- Track carrier capacity, rates and financial health, including the effects of carrier consolidation and the 2016 bankruptcy on margins and service availability.
- Review whether 2017 capital spending, including the European building project, is delivered near the stated estimate and how it affects cash balances.
- Assess working-capital movements and operating cash conversion, particularly as seasonal customer receivables increase.
- Monitor the effects of the new stock-compensation tax accounting and the company’s remaining assessment of revenue-recognition and lease-accounting changes.
- Consider the disclosed $6 million fourth-quarter foreign-exchange gain when comparing underlying quarterly earnings, and review the full notes for legal, tax and other contingencies.