Business context and reporting period
Expeditors International of Washington, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011, with unaudited quarterly results, including fourth-quarter 2011. The company provides global logistics services, including air and ocean freight forwarding, customs brokerage and related services. It is primarily non-asset-based and does not own aircraft or ships. Management emphasizes net revenue (revenue less transportation expenses) as a measure of its service economics.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $6,150.5 million | $5,967.6 million | +3% |
| Net revenue | $1,896.5 million | $1,692.8 million | +12% |
| Operating income | $618.3 million | $547.2 million | +13% |
| Net earnings attributable to shareholders | $385.7 million | $344.2 million | +12% |
| Diluted earnings per share | $1.79 | $1.59 | +13% |
| Cash from operating activities | $457.1 million | $395.5 million | +$61.6 million |
Operating income was 32.6% of net revenue, versus 32.3% in 2010; net earnings attributable to shareholders were 20.3% of net revenue, versus 20.3%. Salaries and related costs were 52% of net revenue, down from 53%. The company reported $1,490.7 million in working capital and $1,294.4 million in cash and cash equivalents at year-end, plus $0.5 million in short-term investments. It had no long-term debt and no borrowings on its $15.1 million of international bank lines.
Capital expenditures were $78.1 million, including $36 million primarily for London and Beijing real estate development. Cash used in investing activities was $80.3 million; cash used in financing activities was $157.1 million, including $112.1 million of share repurchases and $106.0 million of dividends. Dividends paid per share rose to $0.50 from $0.40.
Changes versus comparable periods
For the full year, airfreight net revenue rose 9%, ocean freight and ocean services 13%, and customs brokerage and other services 14%. Airfreight tonnage was flat while net revenue per kilo increased 12%. Ocean consolidation volume rose 2% and net revenue per container increased 10%. Higher customs brokerage net revenue reflected market-share gains and increased domestic time-definite freight volumes. Carrier capacity created favorable buying opportunities that supported yields.
Fourth-quarter 2011 revenue was $1,501.9 million, down about 5% from $1,582.1 million in fourth-quarter 2010; net revenue rose about 5% to $476.2 million from $453.4 million. Shareholder-attributable earnings declined to $92.8 million from $96.5 million, and diluted EPS was $0.43 versus $0.45. Management said the customary peak-season airfreight surge did not materialize. For the year, operating cash flow increased from $395.5 million to $457.1 million, while capital expenditures increased from $42.4 million to $78.1 million.
Outlook, commentary and risks
The company does not issue financial forecasts or projections. Management estimated 2012 capital expenditures at approximately $100 million. It reported that lower underlying flows of goods continued into January 2012 and cited uncertainty in the global economy, customer demand, freight volumes and pricing.
Key operating risks include intense competition, carrier financial weakness and capacity changes, supplier rate increases that may not be passed through promptly, foreign currency exposure, seasonality, and dependence on personnel and technology systems. A hypothetical 10% weakening of the U.S. dollar over 2011 would have increased operating income by approximately $46 million; a 10% strengthening would have reduced it by approximately $38 million, all else equal. The company had no foreign currency derivatives outstanding.
Antitrust matters remain a significant contingency. The DOJ investigation and European Commission proceeding could result in fines that materially affect results or operating cash flow; the company could not estimate a reasonably possible fine, and no amounts were accrued for the disclosed contingencies. In February 2012, the company agreed, subject to court approval, to resolve a U.S. customer class action by assigning plaintiffs 70% of any proceeds it may receive from a separate air-cargo carrier action; management expected no material financial-statement impact. Management considered potential Brazilian fines non-material. The company reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions.
Important facts for investors to verify
- Whether freight volumes, yields and margins remain resilient as carrier capacity, rates and demand change, especially after the weak 2011 peak-season airfreight showing.
- Developments and potential financial exposure in the DOJ and European Commission investigations, and final court approval and terms of the customer-class-action agreement.
- Execution and funding of the planned $100 million 2012 capital program and the effect of ongoing share repurchases and dividends on cash.
- Whether operating cash flow and liquidity remain adequate given seasonal working-capital needs and $377.3 million of unconditional carrier purchase obligations due within one year.
- Foreign-exchange sensitivity and the concentration of operations in international markets, including China and Hong Kong.