Business context and reporting period
Expeditors International of Washington, Inc. filed this Form 10-K for the fiscal year ended December 31, 2009. The company provides global logistics services, including air and ocean freight forwarding, customs brokerage, and related services. It is a non-asset-based provider and does not own aircraft or ships. Although the request identifies 2009 Q4, the filing primarily reports full-year results; fourth-quarter figures are also summarized below.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $4,092.3 | $5,633.9 | -27.4% |
| Net revenue | $1,382.8 | $1,603.3 | -13.8% |
| Operating income | $385.0 | $473.1 | -18.6% |
| Net earnings attributable to shareholders | $240.2 | $301.0 | -20.2% |
| Diluted earnings per share | $1.11 | $1.37 | -19.0% |
| Operating income as a share of net revenue | 27.8% | 29.5% | -1.7 percentage points |
| Net earnings as a share of net revenue | 17.4% | 18.8% | -1.4 percentage points |
| Cash provided by operating activities | $330.8 | $409.0 | -19.1% |
| Capital expenditures | $40.0 | $59.7 | -33.0% |
Liquidity and debt: Year-end cash and cash equivalents were $925.9 million, with $0.7 million in short-term investments. Working capital was $1,079.4 million; current assets were $1,787.8 million and current liabilities $708.4 million. The company reported no long-term debt and no short-term borrowings. It had $25.8 million of foreign subsidiary credit lines unused and $78.5 million of standby letters of credit and guarantees outstanding. Operating leases totaled $134.9 million and unconditional carrier-space purchase obligations totaled $222.9 million, principally due within one year.
The company paid dividends of $0.38 per share in 2009, up from $0.32 in 2008. It used $84.5 million for share repurchases in 2009. Management stated that cash, financing arrangements, and operating cash flows should be sufficient for foreseeable capital and liquidity needs.
Fourth quarter 2009
Q4 revenue was $1,246.9 million, net revenue $369.7 million, net earnings attributable to shareholders $69.1 million, and diluted EPS $0.32. Compared with Q4 2008, these were lower by approximately 4.6%, 8.1%, 11.0%, and 11.1%, respectively.
Material changes and management commentary
- The global economic downturn drove lower air and ocean freight volumes; the downturn began in the second half of 2008. Management described the 2009 decline in total and net revenue as unprecedented in the company’s history.
- Airfreight net revenue fell 15%, reflecting a 13% decline in tonnage. Ocean freight and ocean services net revenue fell 18%; ocean consolidation revenue declined 27%, with volume down 17% and net revenue per container down 13%. Customs brokerage and other services net revenue fell 10% as freight volumes weakened.
- Carrier capacity cuts and rapid rate increases in the second half of 2009 erased favorable spot-market buying conditions from earlier in the year. The company initially absorbed rate increases pending customer negotiations, pressuring yields and margins.
- Salaries and related costs declined 10%, but rose to 56% of net revenue from 54% in 2008. Management cited relatively inflexible base salaries and its decision to retain personnel. Other overhead declined 16%, aided by cost reductions and lower legal expenses.
- Operating income was 19% lower year over year, and field and corporate management bonuses each declined 19%. Stock compensation expense was $39.1 million versus $44.9 million, including a first-quarter forfeiture-related credit.
- Other income, net, declined 32%, mainly because interest income fell $11 million amid lower average interest rates. The effective income tax rate increased to 40.3% from 39.4%.
Outlook, risks, contingencies, and unusual items
- The company does not issue financial forecasts or confirm analyst projections. It said it could not predict the continuing impact of global economic conditions on freight volumes, customer demand, supplier capacity, or customer credit quality.
- Management estimated 2010 capital expenditures of approximately $90 million, including real estate development, compared with $40 million spent in 2009.
- Legal and related costs are expected to increase in 2010 following a European Commission Statement of Objections received on February 10, 2010. The company could face fines or penalties in the DOJ and EC investigations and damages or injunctive relief in related litigation; it could not estimate the range of potential losses. Legal costs for these matters were less than $1 million in 2009, compared with approximately $10 million in 2008.
- The DOJ investigation concerns alleged anti-competitive conduct among air cargo freight forwarders. A federal antitrust class action alleges price fixing of surcharges; claims involving the company concern two surcharges, and its motion to dismiss was pending. The EC proceeding concerns alleged conduct from August 2005 to June 2006 on airfreight lanes between South China/Hong Kong and the European Economic Area. The company said it intended to defend itself.
- Key operating risks include exposure to international trade and economic conditions, intense price competition, carrier financial distress and capacity changes, foreign exchange and regulatory risks, retention of experienced staff, technology disruption, and security or catastrophic events. The company’s $927 million cash-and-investment balance included substantial foreign-held funds; repatriation can be subject to exchange controls.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether freight volumes and carrier pricing recovered after 2009, and whether the company could pass supplier rate increases to customers without further margin pressure.
- Progress, costs, and potential financial outcomes of the DOJ, EC, and private antitrust matters, including any later loss estimates or rulings.
- Whether the $90 million 2010 capital expenditure estimate was met and how planned real estate spending affected cash generation.
- Cash availability by jurisdiction, foreign exchange exposure, and the status and use of credit facilities, guarantees, and carrier commitments.
- Subsequent trends in operating cash flow, working capital, salary costs as a share of net revenue, dividends, and share repurchases.