Expeditors International of Washington, Inc. — FY 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; quarterly figures are unaudited. Expeditors is a non-asset-based global logistics provider, arranging air and ocean freight, customs brokerage, and related services through third-party carriers. It reported results for the full year, not a standalone “2017 Q4” filing.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $6,920.9 million | $6,098.0 million | Up 13.5% |
| Net revenue (non-GAAP) | $2,319.2 million | $2,164.0 million | Up 7.2% |
| Operating income | $700.3 million | $670.2 million | Up 4.5% |
| Net earnings attributable to shareholders | $489.3 million | $430.8 million | Up 13.6% |
| Diluted EPS | $2.69 | $2.36 | Up 14.0% |
| Operating cash flow | $488.6 million | $529.5 million | Down $40.8 million |
Net revenue is revenue less directly related operating expenses and is a company-defined non-GAAP measure. Operating income was 30% of net revenue, versus 31% in 2016; salaries and related costs rose to 55% of net revenue from 53%. The reported effective tax rate declined to 31.8% from 37.0%, principally reflecting U.S. tax reform. The filing does not present a consolidated gross-margin percentage as a key reported measure.
Service trends. Airfreight net revenue increased 7%, with tonnage up 10% but net revenue per kilo down 6%. Ocean net revenue increased 5%; consolidation net revenue fell 1%, as lower revenue per container offset higher volume. Customs brokerage and other services net revenue rose 9%, mainly on higher customs brokerage and road freight volumes.
Fourth quarter. Revenue was $1,901.4 million, net revenue $628.8 million, and shareholder-attributable net earnings $167.0 million, or diluted EPS of $0.92. The quarter’s net earnings included a $39 million net tax benefit related to the 2017 Tax Act; this significantly affects comparison with prior quarters and should not be treated as recurring operating growth.
Liquidity, capital and balance sheet
- Year-end cash and cash equivalents were $1,051.1 million; working capital was $1,448.3 million. The company reported no long-term debt.
- Operating cash flow declined year over year, primarily because of increased accounts receivable, partly offset by higher earnings.
- Capital expenditures were $95.0 million, compared with $59.3 million in 2016. Sale of Miami property generated $84.4 million in cash proceeds and a $4 million gain. Management estimated 2018 capital expenditures of $75 million.
- Share repurchases totaled $478.3 million in cash and dividends paid were $150.5 million; dividends declared and paid were $0.84 per share, up from $0.80.
- Contractual cash obligations totaled $334.5 million, including $259.9 million in operating lease commitments. Standby letters of credit and guarantees totaled $75.3 million. Management said liquidity and operating cash flow should meet requirements for at least the next 12 months and the foreseeable future.
Changes, outlook and key risks
- Improved shipment volumes and higher sell rates lifted revenue, but higher carrier buy rates and competitive pressure weighed on unit economics. Airfreight and ocean freight capacity constraints and sudden carrier price changes may continue to create margin volatility.
- The company does not issue financial forecasts. It expects the Tax Act to reduce its effective tax rate; excluding discrete items and potential adjustments, management estimated a 2018 annual effective tax rate of 31%–34%. The ultimate rate depends in part on the geographic mix of pretax earnings.
- Tax Act accounting was provisional: the company recorded a $13.9 million net tax benefit for specified tax-reform components and a further $25.4 million benefit from the transition to a territorial system. It recorded an estimated $32 million liability for the one-time tax on undistributed foreign earnings and anticipated cash payments of approximately $2 million–$3 million annually in each of the next five years. Estimates could be adjusted through 2018.
- Revenue recognition changes effective January 1, 2018 are expected to move transportation revenue recognition to over time, defer more revenue, and change certain services from net to gross presentation. The company estimated an opening retained-earnings reduction of less than $35 million under the modified retrospective transition method.
- Lease accounting changes are expected to put leases exceeding one year on the balance sheet; future minimum lease payments were $259.9 million at year-end. Adoption was scheduled for 2019.
- Other material risks include dependence on airline, ocean and ground carriers; global trade and economic fluctuations; intense competition; foreign-exchange exposure; cybersecurity and system continuity; regulatory and compliance requirements; and customer credit and collection risk. Net foreign-currency losses were approximately $13 million in 2017.
- Ordinary-course legal claims and investigations were not expected by management to materially affect operations, cash flows or financial position; recorded accruals were not significant, and additional reasonably possible losses could not be estimated. The auditor issued an unqualified opinion on the financial statements and internal controls were reported effective.
Important facts for investors to verify
- How provisional Tax Act accounting and the estimated foreign-earnings tax liability were finalized, and how tax payments affect future cash flow.
- Whether carrier pricing and capacity conditions allow net revenue per shipment and service margins to stabilize or improve.
- The actual revenue-recognition transition effects on reported revenue, net revenue, and opening retained earnings, including presentation changes.
- How receivables and customer collections affect operating cash flow, and whether elevated capital spending continues.
- Lease-accounting implementation, repurchase pace, and the balance between shareholder returns and investment in technology and operations.