Expeditors International of Washington, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparative results are for FY 2011 and FY 2010. The filing also reports unaudited fourth-quarter results. Expeditors is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage, and related services. It does not own aircraft or ships.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $5.981 billion | $6.150 billion | -2.8% |
| Net revenue | $1.824 billion | $1.896 billion | -3.8% |
| Operating income | $530.8 million | $618.3 million | -14.2% |
| Net earnings attributable to shareholders | $333.4 million | $385.7 million | -13.6% |
| Diluted EPS | $1.57 | $1.79 | -12.3% |
| Cash from operating activities | $370.1 million | $457.1 million | -19.0% |
Margins: Operating income was 29.1% of net revenue, down from 32.6%; shareholder net earnings were 18.3% of net revenue, down from 20.3%. The effective tax rate was 39.5%, unchanged from 2011.
Business mix: Net revenue was $617.2 million from airfreight (34% of total), $432.7 million from ocean freight and ocean services (24%), and $774.2 million from customs brokerage and other services (42%). Airfreight net revenue fell 12%, ocean net revenue fell 1%, and customs brokerage and other net revenue rose 2%.
Q4 2012: Revenue was $1.533 billion versus $1.502 billion in Q4 2011; net revenue was $458.7 million versus $476.2 million; shareholder net earnings were $84.2 million versus $92.8 million; diluted EPS was $0.40 versus $0.43.
Liquidity, cash flow, and capital
- Year-end cash and cash equivalents were $1.261 billion; working capital was $1.515 billion; total assets were $2.954 billion and shareholders’ equity was $2.028 billion.
- No long-term debt was outstanding. The company reported $204,000 drawn on foreign subsidiary credit lines and approximately $15.5 million available to borrow.
- Operating cash flow declined by $87 million, mainly due to working-capital changes and lower earnings. Capital expenditures were $47.6 million, compared with $78.1 million in 2011.
- Financing cash outflow was $363.0 million, including $302.4 million of share repurchases and $117.3 million of dividends. Dividends per share increased to $0.56 from $0.50.
- Management estimated 2013 capital expenditures at $100 million, including real estate development, and said cash and operating cash flow should meet foreseeable liquidity needs.
Material changes and management commentary
- Management attributed weaker results to uncertain global economic conditions, competitive pricing pressure, higher carrier rates that could not be passed through promptly, and lower airfreight tonnage. Airfreight tonnage fell 6% and net revenue per kilo fell 7%.
- Ocean consolidation net revenue fell 7%, driven by a 4% decrease in net revenue per container and a 2% decline in container volume. Carrier capacity and rate volatility pressured yields.
- Salary and related costs rose slightly to $995.1 million; as a share of net revenue they increased to 54.6% from 52.4%. Other overhead costs rose 5%.
- Other overhead included a €4.14 million ($5.5 million) European Commission fine for anti-competitive behavior, approximately $5.9 million for an adjustment to certain foreign indirect withholding taxes, and $3 million of costs expensed after abandoning certain real estate development projects.
- Management expected similar industry trends to continue in the near term absent meaningful improvement in market conditions. The company does not issue financial forecasts.
Risks, contingencies, and unusual items
- Key risks include changes in international trade and economic activity, carrier financial health and capacity, competition and margin pressure, foreign exchange movements, regulatory and security requirements, technology disruptions or cyberattacks, and retaining key personnel.
- The company reported $98.6 million of standby letters of credit and guarantees, principally supporting foreign subsidiaries’ carrier credit and customs-duty or tax deferrals. Management said the underlying obligations were recorded by those subsidiaries.
- Contractual cash obligations totaled $201.4 million, including $86.9 million of space-reservation purchase commitments expected to be fulfilled in 2013 and $108.3 million of operating leases.
- Ordinary-course legal matters were accrued at amounts management considered not significant; the company could not estimate additional possible losses. Management said no current matter was expected to significantly affect operations or financial position.
- The company reported no material off-balance-sheet arrangements and no foreign currency derivatives outstanding at year-end. A hypothetical 10% weakening of the U.S. dollar would have increased operating income by about $40 million; a 10% strengthening would have reduced it by about $33 million, all else equal.
Investor verification priorities
- Verify the drivers and durability of the airfreight decline, including tonnage, yield per kilo, and customers’ shift to deferred air or ocean freight.
- Assess whether carrier rate increases can be passed through, and monitor net revenue per kilo/container and operating margin trends.
- Review the European Commission fine, related legal disclosures, and any subsequent developments in the foreign tax adjustment.
- Track cash conversion, working-capital requirements, the planned $100 million of 2013 capital spending, and the scale and pricing of share repurchases.
- Consider exposure to carrier distress, foreign currency movements, regulatory changes, and concentration of operations in China; China accounted for 34% of 2012 revenue and 17% of year-end identifiable assets.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective at year-end.