How did Expeditors' core profitability trend in 2002?

Profitability improved. Net earnings rose 16% to $112.5 million, operating income rose 17% to $171.0 million, and operating income as a share of net revenues increased to 25% from 24%. Growth came from higher tonnage and a broad expansion of net revenues, while operating expenses held at about 75% of net revenues.

Why did operating cash flow fall even though earnings grew?

Operating cash flow dropped to $116 million from $168 million mainly because accounts receivable increased by $99 million during the year. Peak-season billings and customs brokerage cash advances, which are passed through to governments and billed to customers, expanded receivables. Management notes that conventional DSO is not a reliable collection measure given these pass-through advances.

What are the main risks to the business model?

Key risks include reliance on third-party airlines and steamship lines for capacity and pricing, exposure to currency controls and foreign exchange in many countries (with an estimated $12.7 million operating income benefit from a 10% dollar weakening), seasonality that can make quarterly results hard to predict, and industry consolidation that favors larger competitors. The company also notes it has no long-term debt, but its results depend heavily on international trade volumes and policies.

Is Expeditors investing in growth through acquisitions or facilities?

Expeditors primarily grows organically and did not open any new offices in 2002. It did, however, spend $81 million on capital expenditures, including about $59 million on facilities in New Jersey and the United Kingdom, and paid $31.3 million into escrow for a San Francisco-area facility that closed in January 2003. The company plans roughly $35 million of normal capex in 2003, funded from cash.

What returns are shareholders receiving?

The company paid semi-annual dividends of $0.06 per share in 2002, up from $0.05 in 2001 (total $0.12 per share for the year). It also repurchased shares under its non-discretionary plan using option exercise proceeds, though no shares were bought under the discretionary plan in 2002. Shares traded between $25.50 and $34.44 during 2002.

EXPD 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2003. Cited figures are marked; the original filing is the authoritative source.

Expeditors International of Washington (EXPD) delivered a strong 2002, with total revenues up 22% to $2.30 billion^a (from $1.88 billion) and net revenues (the company's preferred yield-based measure) up 12.5% to $682.2 million.

Net earnings rose 16% to $112.5 million, and diluted EPS increased to $1.03^b from $0.89, after adjusting for the June 2002 2-for-1 stock split. Operating income grew 17% to $171.0 million, and operating margin on net revenues edged up to 25% from 24%. Growth was broad-based across airfreight (net revenues +12%), ocean freight (+18%), and customs brokerage (+9%), with same-store net revenue growth of 12% and same-store operating income growth of 16%.

Management attributes results to its non-asset-based model and incentive compensation structure tied to branch profits. The balance sheet remains conservative, with no long-term debt, $212 million^c in cash and short-term investments, and working capital of $249 million. Shareholders' equity rose 26% to $524 million.

Operating cash flow fell to $116 million^d from $168 million, mainly because of a $99 million increase in receivables tied to strong peak-season billings and customs cash advances. Capital spending roughly doubled to $81 million, including about $59 million for real estate in New Jersey and London and a $31 million escrow payment for a San Francisco facility that closed in January 2003. Key risks for investors include currency controls in certain countries, dependence on third-party carriers whose pricing and capacity could shift, seasonal quarterly patterns, and the ongoing consolidation of the logistics industry.

Airfreight margins compressed about 2% due to carrier rate increases, and ocean margins fell 1% amid falling Far East rates. Interest income declined by $2.9 million as rates fell, and the company recorded a $3.5 million impairment charge on other assets in Q4 2002.

02—Key points

Key Highlights

Total revenues rose 22% to $2.30 billion; net revenues rose 12.5% to $682.2 million, with growth in all three service lines.
Net earnings increased 16% to $112.5 million; diluted EPS rose to $1.03 from $0.89 (split-adjusted).
Operating income grew 17% to $171.0 million, and operating margin on net revenues improved to 25% from 24%.
Same-store net revenues grew 12% and same-store operating income grew 16%, indicating strong organic growth.
Balance sheet is strong: no long-term debt, $212 million in cash and short-term investments, and equity up 26% to $524 million.
Operating cash flow declined to $116 million from $168 million, driven by a $99 million receivables build; capex nearly doubled to $81 million, including real estate acquisitions.
Margin pressure from carrier rate increases in airfreight (about -2%) and falling Far East ocean rates (about -1%), plus a $3.5 million impairment charge in Q4 2002.

03—Questions

Frequently Asked Questions

How did Expeditors' core profitability trend in 2002?
Profitability improved. Net earnings rose 16% to $112.5 million, operating income rose 17% to $171.0 million, and operating income as a share of net revenues increased to 25% from 24%. Growth came from higher tonnage and a broad expansion of net revenues, while operating expenses held at about 75% of net revenues.
Why did operating cash flow fall even though earnings grew?
Operating cash flow dropped to $116 million from $168 million mainly because accounts receivable increased by $99 million during the year. Peak-season billings and customs brokerage cash advances, which are passed through to governments and billed to customers, expanded receivables. Management notes that conventional DSO is not a reliable collection measure given these pass-through advances.
What are the main risks to the business model?
Key risks include reliance on third-party airlines and steamship lines for capacity and pricing, exposure to currency controls and foreign exchange in many countries (with an estimated $12.7 million operating income benefit from a 10% dollar weakening), seasonality that can make quarterly results hard to predict, and industry consolidation that favors larger competitors. The company also notes it has no long-term debt, but its results depend heavily on international trade volumes and policies.
Is Expeditors investing in growth through acquisitions or facilities?
Expeditors primarily grows organically and did not open any new offices in 2002. It did, however, spend $81 million on capital expenditures, including about $59 million on facilities in New Jersey and the United Kingdom, and paid $31.3 million into escrow for a San Francisco-area facility that closed in January 2003. The company plans roughly $35 million of normal capex in 2003, funded from cash.
What returns are shareholders receiving?
The company paid semi-annual dividends of $0.06 per share in 2002, up from $0.05 in 2001 (total $0.12 per share for the year). It also repurchased shares under its non-discretionary plan using option exercise proceeds, though no shares were bought under the discretionary plan in 2002. Shares traded between $25.50 and $34.44 during 2002.

04—Continue

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