Business context and reporting period
Expeditors International of Washington, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company provides global freight forwarding, consolidation, customs brokerage and logistics services. It is a non-asset-based provider: it does not own aircraft or ships and relies on third-party carriers. Net revenue—revenue less transportation expenses—is a more useful measure of its service activity than gross revenue.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $5,967.6 million | $4,092.3 million | +45.8% |
| Net revenue | $1,692.8 million | $1,382.8 million | +22.4% |
| Operating income | $547.2 million | $385.0 million | +42.1% |
| Net earnings attributable to shareholders | $344.2 million | $240.2 million | +43.3% |
| Diluted EPS | $1.59 | $1.11 | +43.2% |
| Operating income / net revenue | 32.3% | 27.8% | +4.5 percentage points |
- Net revenue by service: airfreight $640.2 million (+31%); ocean freight and ocean services $385.5 million (+19%); customs brokerage and other services $667.0 million (+17%).
- Operating cash flow was $395.5 million, versus $330.8 million in 2009. Investing activities used $42.2 million, including $42.4 million of property and equipment purchases. Financing activities used $208.6 million, primarily reflecting share repurchases and dividends.
- At year-end, cash and cash equivalents were $1,084.5 million, working capital was $1,278.4 million, and shareholders’ equity was $1,740.9 million. The company reported no long-term debt and no short-term borrowings.
- 2010 dividends were $0.40 per share. The company repurchased $246.3 million of common stock during the year.
Material changes versus comparable periods
Freight volumes recovered from the 2009 downturn, which management said began to improve in the fourth quarter of 2009 and continued through 2010. Airfreight tonnage rose 35%; ocean consolidation volume rose 20% in FEUs. Net revenue per kilo declined slightly, and ocean consolidation net revenue per container fell 3%, reflecting less favorable buying opportunities than in 2009.
Higher volumes and operating leverage lifted operating income and margins. Salaries and related costs increased 16% in dollars, but declined as a share of net revenue, which management attributed in part to improved staff productivity. The effective income tax rate fell to 38.9% from 40.3%, primarily due to a higher tax benefit from disqualifying dispositions of incentive stock options. By comparison, 2009 net revenue and earnings had fallen substantially from 2008.
Fourth-quarter 2010 revenue was $1,582.1 million and net revenue was $453.4 million; shareholder-attributable earnings were $96.5 million and diluted EPS was $0.45. Fourth-quarter 2009 figures were $1,246.9 million, $369.7 million, $69.1 million and $0.32, respectively.
Outlook, risks, contingencies and unusual items
- Outlook: Management issued no financial forecast and stated a policy against issuing or confirming forecasts. It said it could not predict whether the freight-volume recovery would continue given global economic uncertainty. The company estimated 2011 capital expenditures of $117 million, including real estate development, and expected London and Beijing office/warehouse projects to be completed in 2011.
- Carrier capacity and pricing: Carriers were recovering from losses but remained highly leveraged and were managing capacity. Rate changes can be passed through to customers only after negotiation, potentially pressuring yields and margins; management said maintaining historical unit profitability remained challenging.
- Legal matters: The company faced a U.S. Department of Justice investigation, a European Commission proceeding, a Brazilian Ministry of Justice proceeding and related U.S. antitrust class-action litigation. The company disputed the allegations and was defending itself. It reported approximately $1 million of related legal and associated costs in 2010 and approximately $15 million cumulatively since proceedings began. It could not estimate a loss range; fines, damages or remedies could materially affect results and cash flows.
- Commitments and liquidity: Contractual cash obligations totaled $345.6 million, including $180.2 million of carrier-space purchase commitments expected to be fulfilled in 2011. Standby letters of credit and guarantees totaled $91.5 million; the company had no amounts outstanding on its bank lines. Management believed cash and operating cash flows would meet foreseeable needs.
- Other risks: International trade and foreign currency exposure, customer demand and seasonality, competition, regulation and security requirements, key-personnel retention, technology disruption, taxes, and catastrophic events. A hypothetical 10% U.S. dollar weakening over 2010 would have increased operating income by about $40 million; a 10% strengthening would have reduced it by about $32 million.
- The company planned to adopt ASU 2009-13 in the first quarter of 2011 and did not expect a material effect on results.
Important facts for investors to verify
- Review subsequent developments and potential financial exposure in the DOJ, EC, Brazilian and class-action matters; the filing gives no estimable loss range.
- Track freight volumes, carrier capacity and rate pass-through, including whether higher activity sustains net revenue per shipment and operating margins.
- Check 2011 capital spending against the $117 million estimate and assess the effect of major property projects on cash.
- Assess working-capital needs as receivables rose to $1,003.9 million from $810.4 million, and reconcile future cash generation with buybacks and dividends.
- Consider foreign currency, carrier and customer credit exposure alongside the $91.5 million in standby guarantees and letters of credit.