Expeditors International of Washington, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports quarterly results. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Expeditors is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage, and related services. It relies on third-party carriers and does not own aircraft or ships. Its reported revenue includes carrier costs when it acts as principal; management therefore uses net revenue—revenue less directly related service costs—as an important operating measure.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $6.080 billion | $5.992 billion | +1.5% |
| Net revenue (non-GAAP) | $1.883 billion | $1.835 billion | +2.6% |
| Operating income | $552.1 million | $530.8 million | +4.0% |
| Net earnings attributable to shareholders | $348.5 million | $333.4 million | +4.6% |
| Diluted EPS | $1.68 | $1.57 | +7.0% |
| Operating income / net revenue | 29% | 29% | Approximately unchanged |
| Net earnings / net revenue | 18% | 18% | Approximately unchanged |
- Service performance: Airfreight net revenue rose 4%, with tonnage up 4%; ocean net revenue rose 1%, with container volume up 6%; customs brokerage and other services net revenue rose 3%.
- Cash flow: Operating cash flow was $407.5 million, compared with $370.1 million in 2012. Investing activities used $76.8 million, including $53.4 million of capital expenditures. Financing activities used $332.0 million, including $261.9 million of share repurchases and $123.3 million of dividends.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $1.274 billion; working capital was $1.545 billion. The company had no long-term debt and no significant short-term borrowings.
- Capital and returns: Shareholders’ equity was $2.085 billion. Dividends paid per share increased to $0.60 from $0.56. The company repurchased $261.9 million of common stock during 2013.
Material changes versus the prior comparable period
Revenue and net revenue increased modestly, and earnings improved from 2012 but remained below 2011 levels. Airfreight improved with higher volume, while ocean results benefited from volume and order-management services despite weak freight rates. Customs brokerage growth reflected higher customer volumes, partly offset by higher costs in time-definite transportation services. Management said competitive conditions and pricing pressure compressed unitary margins during 2013.
Operating income benefited from lower other overhead costs than in 2012, which included a €4.14 million ($5.5 million) European Commission fine, a $6 million foreign indirect withholding-tax adjustment, and a $3 million real-estate project write-off. In 2013, the company recorded an $8 million retirement bonus for CEO Peter Rose. Share repurchases reduced weighted-average diluted shares, contributing to EPS growth.
In the fourth quarter, revenue was $1.626 billion versus $1.536 billion, and net revenue was $478.1 million versus $461.5 million. Net earnings attributable to shareholders were $83.5 million versus $84.2 million; diluted EPS was $0.41 versus $0.40. Fourth-quarter 2013 results included the $8 million retirement-bonus expense.
Outlook, management commentary, risks and contingencies
- Management estimated 2014 capital expenditures of approximately $75 million, including routine spending and additional real-estate development. It stated that it does not issue financial forecasts or projections.
- Management expected competitive conditions to continue. Key operating uncertainties include freight volumes, customer demand, carrier capacity and financial stability, rate volatility, and the ability to pass carrier cost increases on to customers.
- Other material risks include exposure to foreign currencies and changing trade, customs, tax and security regulations; reliance on third-party carriers and agents; cyber or systems disruption; and retaining key personnel. Foreign-currency sensitivity analysis estimated that a 10% average weakening of the U.S. dollar would have raised 2013 operating income by about $40 million, while a 10% strengthening would have reduced it by about $33 million; these are hypothetical estimates, not forecasts.
- Peter Rose planned to retire as CEO effective March 1, 2014; Jeffrey Musser was appointed to succeed him. Rose expected to remain board chair until the May 2015 annual meeting. The company recorded the estimated $8 million retirement bonus in full in 2013.
- Standby letters of credit and guarantees totaled approximately $82.2 million, primarily supporting foreign subsidiaries’ ordinary-course carrier and customs-related obligations. Contractual cash obligations totaled $181.3 million, including $71.8 million of carrier space-purchase commitments expected to be fulfilled in 2014.
- Management said ordinary-course legal matters were not expected to have a significant effect and accrued amounts were not significant; it could not estimate additional reasonably possible losses. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Track whether improved freight volumes and net revenue persist, particularly if carrier rates, capacity or pricing competition change.
- Assess the impact of the CEO transition and the one-time retirement-bonus expense on future compensation costs and execution.
- Review the planned $75 million 2014 capital expenditures and continued share repurchases against operating cash flow and liquidity.
- Monitor the $82.2 million of guarantees, carrier purchase commitments, and any developments in legal, tax or regulatory matters.
- Compare reported revenue with net revenue when evaluating performance, because freight revenues include pass-through carrier charges in principal transactions.