Business context and reporting period
Expeditors International of Washington, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company is a non-asset-based global logistics provider, arranging air and ocean freight, customs brokerage, warehousing, distribution and related services. It does not own aircraft or ships. Financial amounts below are in U.S. dollars; “net revenues” is the company’s non-GAAP measure of revenue less directly related service expenses.
The filing also reports fourth-quarter results, but it is an annual filing rather than a standalone quarterly filing.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $8,138.4 million | $6,920.9 million | +17.6% |
| Net revenues | $2,620.4 million | $2,319.2 million | +13.0% |
| Operating income | $796.6 million | $700.3 million | +13.8% |
| Net earnings attributable to shareholders | $618.2 million | $489.3 million | +26.3% |
| Diluted earnings per share | $3.48 | $2.69 | +29.4% |
| Cash from operating activities | $572.8 million | $488.6 million | +$84.2 million |
Operating income was 30.4% of net revenues, compared with 30.2% in 2017. Net earnings attributable to shareholders were 24% of net revenues versus 21% in 2017. The company’s effective tax rate fell to 24.3% from 31.8%, contributing to earnings growth.
Fourth-quarter 2018 revenue was $2,235.6 million, net revenues $680.7 million, net earnings attributable to shareholders $179.2 million and diluted EPS $1.02. Compared with fourth-quarter 2017, those measures increased approximately 17.6%, 8.2%, 7.3% and 10.9%, respectively. Fourth-quarter 2017 earnings included a $39 million net tax benefit from U.S. tax reform.
Airfreight net revenues grew 15%, supported by higher net revenue per kilo and 3% tonnage growth. Ocean freight and services net revenues rose 4%; ocean consolidation net revenues declined 2% amid competitive pricing, partly offset by 5% higher container volume. Customs brokerage and other services net revenues grew 17%, led by customs brokerage, road freight and distribution activity.
At year-end, cash and cash equivalents were $923.7 million, working capital was $1,408.0 million, and the company had no long-term debt. Current assets of $2,734.8 million and current liabilities of $1,326.8 million imply a current ratio of about 2.1. Cash declined $127.4 million during the year. Financing cash outflows included $647.9 million of share repurchases and $156.8 million of dividends. Capital expenditures were $47.5 million; management estimated 2019 capital expenditures of approximately $50 million. The company stated that cash and operating cash flows should meet liquidity needs for at least the next 12 months and thereafter for the foreseeable future.
Material changes versus the prior comparable period
- Revenue and net revenues increased, with growth across all three principal service categories. Customs brokerage and other services revenue rose 35%, partly reflecting a change in gross-versus-net presentation.
- Under the revenue-recognition standard adopted January 1, 2018, certain warehouse and distribution revenue and related expenses were reported gross, adding approximately $225 million to each in 2018. Prior-year figures were not recast, limiting direct revenue comparisons; the change did not represent equivalent incremental net revenue.
- Net cash from operations increased by $84 million, while cash used in investing activities increased to $48.4 million from $11.7 million. 2017 investing cash flows included approximately $84 million of proceeds from a property sale.
- Share repurchases increased to $647.9 million from $478.3 million. Weighted-average diluted shares fell to 177.8 million from 181.7 million.
- U.S. tax reform reduced the U.S. federal corporate rate to 21% beginning in 2018 and materially affected reported tax rates and year-over-year earnings comparisons.
Outlook, commentary, risks and contingencies
The company provides no financial forecast or earnings guidance and says it does not issue or confirm projections. It expects its customary seasonal pattern may continue, with the first quarter typically weakest and the third and fourth quarters strongest, but cautions that this pattern is not assured. Management’s stated strategic priorities include profitable organic growth, targeted market and customer development, stronger Europe-Asia and Europe-North America alignment, and expansion of China import capabilities.
Management highlighted uncertainty in global trade and economic conditions, including U.S.-China tariffs and U.K.-EU negotiations. Other significant risks include volatile carrier pricing and capacity, carrier financial health and industry consolidation, fuel-price changes, intense competition, currency movements, dependence on key personnel, regulatory and compliance requirements, and operational disruption or cybersecurity incidents. Carrier cost increases may not be passed through to customers quickly or fully, potentially pressuring margins. The company also noted that marine fuel sulfur rules effective in 2020 were expected to raise ocean carriers’ costs.
Leases with future minimum payments totaled $317.8 million at year-end. The company expected adoption of the new lease accounting standard in 2019 to result in an initial right-of-use asset and lease liability of approximately $370 million. Standby letters of credit and guarantees totaled approximately $67.6 million. Ordinary-course legal claims and investigations were not expected by management to have a significant effect; accrued amounts were not significant, and additional potential losses could not be estimated. There were no material off-balance-sheet arrangements.
The company 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
- Assess underlying growth and margins after accounting for the $225 million gross presentation change, and distinguish revenue growth from net-revenue growth.
- Review the drivers and sustainability of the lower 2018 effective tax rate, including the impact of tax reform, tax credits and share-based compensation deductions; note the $39 million tax benefit in fourth-quarter 2017.
- Monitor carrier capacity, buy-rate and sell-rate trends, especially in ocean freight, and the company’s ability to pass through fuel and other carrier cost increases.
- Verify the 2019 lease-standard balance-sheet impact against the estimated $370 million initial asset and liability, and track capital spending against the approximately $50 million estimate.
- Consider the scale of shareholder distributions, cash balances, working-capital movements and contingent guarantees alongside operating cash generation.