Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company is a non-asset-based global logistics provider offering air and ocean freight forwarding, customs brokerage, and value-added distribution services. It operates through a network of full-service offices, international service centers, and agents in 61 countries. The Company does not own aircraft or steamships.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $5,633,878 | $5,235,171 |
| Net Revenues (Revenues less freight consolidation) | $1,603,261 | $1,452,961 |
| Operating Income | $473,136 | $423,400 |
| Net Earnings | $301,014 | $269,154 |
| Diluted EPS | $1.37 | $1.21 |
| Operating Cash Flow | $408,966 | $312,585 |
| Working Capital | $903,010 | $764,944 |
| Total Assets | $2,100,839 | $2,069,065 |
| Long-Term Debt | $0 | $0 |
| Cash & Short-Term Investments | $741,686 | $575,273 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.6% and net revenues increased 10.3% compared to 2007. This growth occurred despite a global economic downturn that reduced air and ocean freight volumes in the second half of 2008.
- Profitability: Net earnings increased 11.8% to $301 million. Operating income margin remained stable at 29% of net revenues.
- Service Segment Performance:
- Airfreight: Net revenues increased 10% (driven by a 12% increase in net revenue per kilo, offset by a 4% decline in tonnage).
- Ocean Freight: Net revenues increased 14% (driven by an 11% increase in net revenue per container, with volumes remaining flat).
- Customs Brokerage: Net revenues increased 9%.
- Expenses: Salaries and related costs increased 9% to $863.8 million. Other overhead expenses increased 12% to $266.3 million, largely due to a $10 million increase in legal expenses related to antitrust investigations (up from $4 million in 2007).
- Liquidity: Cash and short-term investments increased by approximately $166 million, driven by strong operating cash flows and reduced capital expenditures ($60 million in 2008 vs. $83 million in 2007).
Guidance, Outlook, Risks, and Contingencies
- Economic Outlook: Management notes that air and ocean freight volumes were lower in the second half of 2008 due to the global economic downturn. The Company cannot predict the ongoing impact of this downturn or the effectiveness of governmental stimulus plans.
- Legal Contingencies (Antitrust):
- DOJ Investigation: The U.S. Department of Justice is investigating alleged anti-competitive behavior among air cargo freight forwarders. As of Dec 31, 2008, the Company had incurred approximately $14 million in cumulative legal costs. Potential fines or penalties could materially impact financial results.
- EC Investigation: The European Commission is conducting a similar investigation. The Company expects to incur additional costs and potential administrative fines.
- Class Action: The Company is a defendant in a federal antitrust class action lawsuit filed in New York seeking unspecified damages.
- Other Litigation: A former employee filed a class action lawsuit regarding overtime and meal breaks; however, the plaintiff announced in February 2009 that the suit would proceed only as an individual claim, which management believes will not significantly affect operations.
- Market Risks: The Company is exposed to foreign exchange risk. A 10% weakening of the U.S. dollar would have increased operating income by approximately $40 million in 2008, while a 10% strengthening would have reduced it by $33 million.
- Capital Expenditures: Estimated at $70 million for 2009, primarily for technology, real estate, and leasehold improvements.
Investor Verification Checklist
- Antitrust Exposure: Verify the status of the DOJ and EC investigations and the potential magnitude of fines or penalties, as these represent a significant contingent liability.
- Volume vs. Yield: Confirm the sustainability of revenue growth driven by yield (price per kilo/container) increases rather than volume growth, given the reported decline in global freight volumes.
- Legal Costs: Monitor the trajectory of legal expenses related to antitrust proceedings, which rose significantly in 2008.
- Cash Position: Review the composition of the $742 million cash and short-term investment portfolio for exposure to credit market disruptions.
- Foreign Currency: Assess the impact of currency fluctuations on future earnings, given the Company's significant international operations.