What drove the strong revenue and earnings growth in 2004?

Airfreight net revenues grew 25% on a 23% increase in global tonnage, and customs brokerage net revenues grew 23% as customers sought computerized, compliance-focused brokers. Ocean freight volumes rose 29%, but ocean net revenues grew only 10% because yields fell 200 basis points amid carrier rate increases that could not be passed on promptly. Management attributes the results largely to its compensation model, which ties branch-level manager pay to branch profitability.

How will the adoption of SFAS 123R affect future earnings?

The company must begin expensing employee stock options at fair value starting July 1, 2005, which management expects to have a material impact on operating results, EPS, and cash flow statement presentation. The filing states that the impact has not yet been quantified and the adoption method has not been determined. Management also expects salaries as a percentage of net revenues to become more volatile as a result.

Does the company carry significant debt or off-balance-sheet risk?

No. At year-end 2004, Expeditors had no long-term debt and only $2.3 million in short-term borrowings. Management reports no material off-balance-sheet arrangements. The company does have $82.7 million in contingent liabilities from standby letters of credit and guarantees supporting foreign subsidiary obligations to airlines and governments, but management says no additional expense would be recorded unless the parent were required to perform, which it considers unlikely.

Why do quarterly results fluctuate, and what should investors expect?

Results are seasonal, with the first quarter traditionally the weakest and the third and fourth quarters the strongest, driven by climate, holidays, and consumer demand. Many customers ship late in a quarter, so the company may not see a shortfall until late in the period. Because analysts' expectations are not always met, even small revenue shortfalls could hurt the stock price, so investors should not rely on quarter-to-quarter comparisons alone.

How exposed is the company to currency and international trade risks?

The company operates in 57 countries and generates the majority of revenue and operating income outside the U.S., so it is exposed to currency controls, tariff and trade policy changes, and geopolitical disruption. Management does not use derivatives and relies on accelerating intercompany settlements instead. A 10% weakening of the U.S. dollar would have raised 2004 operating income by about $19 million, while a 10% strengthening would have reduced it by about $15 million.

EXPD 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2005. Cited figures are marked; the original filing is the authoritative source.

Expeditors International of Washington (EXPD) closed 2004 with a strong year of growth in its non-asset based global logistics business.

Total revenues rose 26% to $3.32 billion^a from $2.62 billion, while net revenues (revenues less freight consolidation costs) grew 21% to $906 million. Operating income increased 29% to $241 million, and net earnings rose 28% to $156 million, or $1.41 per diluted share versus $1.12 in 2003. Growth was broad-based across airfreight (net revenues up 25%), customs brokerage (up 23%), and ocean freight volumes (up 29%, though net revenue rose only 10% due to a 200 basis point yield decline).

Same-store net revenue growth of 20% and operating income growth of 29% suggest the growth is largely organic rather than acquisition-driven. The balance sheet is conservative, with $409 million^b in cash and short-term investments, no long-term debt, and working capital of $522 million. Operating cash flow nearly doubled to $193 million.

Management highlighted several items investors should watch. Under SFAS 123R, which takes effect July 1, 2005, the company expects a material charge to earnings from expensing stock options, and salary costs as a percentage of net revenues may become more volatile. The company also expects 2005 capital expenditures above $100 million^c, including potential investment tied to the American Jobs Creation Act repatriation provisions, which could lower tax expense if the company repatriates foreign earnings.

The filing also points to business risks. Revenue is concentrated in international trade flows and dependent on carrier relationships and government customs regulation. Results are seasonal, with the first quarter typically weakest, and the company warns that short-term revenue shortfalls can hit the stock hard.

Ocean yields compressed in 2004 as carrier rate increases could not be passed through promptly. The company does not own aircraft or vessels, and it holds $82.7 million^d in contingent guarantees tied to foreign subsidiaries, though management considers the likelihood of parent-level payment remote.

02—Key points

Key Highlights

Total revenues grew 26% to $3.32 billion in 2004, and net revenues grew 21% to $906 million, driven by airfreight volume growth of 23% globally.
Operating income rose 29% to $241 million, with operating margin on net revenues improving to 27% from 25%, reflecting cost containment in branch-level other operating expenses.
Diluted EPS increased to $1.41 from $1.12 (up 26%), and net earnings reached a record $156 million.
Same-store net revenue grew 20% and same-store operating income grew 29%, indicating strong internal organic growth.
The balance sheet is strong, with $409 million in cash and short-term investments, no long-term debt, and operating cash flow of $193 million (up from $114 million).
Upcoming SFAS 123R adoption in Q3 2005 is expected to materially reduce earnings and EPS, and 2005 capex is guided above $100 million.
The company repurchased 612,533 shares in 2004 at an average price of $47.62, and dividends rose to $0.22 per share from $0.16.

03—Questions

Frequently Asked Questions

What drove the strong revenue and earnings growth in 2004?
Airfreight net revenues grew 25% on a 23% increase in global tonnage, and customs brokerage net revenues grew 23% as customers sought computerized, compliance-focused brokers. Ocean freight volumes rose 29%, but ocean net revenues grew only 10% because yields fell 200 basis points amid carrier rate increases that could not be passed on promptly. Management attributes the results largely to its compensation model, which ties branch-level manager pay to branch profitability.
How will the adoption of SFAS 123R affect future earnings?
The company must begin expensing employee stock options at fair value starting July 1, 2005, which management expects to have a material impact on operating results, EPS, and cash flow statement presentation. The filing states that the impact has not yet been quantified and the adoption method has not been determined. Management also expects salaries as a percentage of net revenues to become more volatile as a result.
Does the company carry significant debt or off-balance-sheet risk?
No. At year-end 2004, Expeditors had no long-term debt and only $2.3 million in short-term borrowings. Management reports no material off-balance-sheet arrangements. The company does have $82.7 million in contingent liabilities from standby letters of credit and guarantees supporting foreign subsidiary obligations to airlines and governments, but management says no additional expense would be recorded unless the parent were required to perform, which it considers unlikely.
Why do quarterly results fluctuate, and what should investors expect?
Results are seasonal, with the first quarter traditionally the weakest and the third and fourth quarters the strongest, driven by climate, holidays, and consumer demand. Many customers ship late in a quarter, so the company may not see a shortfall until late in the period. Because analysts' expectations are not always met, even small revenue shortfalls could hurt the stock price, so investors should not rely on quarter-to-quarter comparisons alone.
How exposed is the company to currency and international trade risks?
The company operates in 57 countries and generates the majority of revenue and operating income outside the U.S., so it is exposed to currency controls, tariff and trade policy changes, and geopolitical disruption. Management does not use derivatives and relies on accelerating intercompany settlements instead. A 10% weakening of the U.S. dollar would have raised 2004 operating income by about $19 million, while a 10% strengthening would have reduced it by about $15 million.

04—Continue

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