How much of 2005's earnings growth was driven by the one-time tax benefit?

The company recorded a one-time $21.7 million tax benefit under IRC Section 965 in Q4 2005, worth about $0.19 per share. It lowered the effective tax rate to 29.6% from 35.4%. Without it, net earnings growth would have been roughly 26% rather than 40%. The benefit is tied to a plan requiring about $105 million of qualified capital expenditures over the next two to three years.

What is the outlook for 2006 expenses and earnings quality?

Management expects the adoption of SFAS 123R, which requires expensing employee stock options at fair value, to have a material impact on the balance sheet, results of operations, EPS and cash flow statement. It also expects salaries and related costs as a percentage of net revenues to become more volatile, so the historically stable compensation ratio of about 53% may not hold in 2006.

Is the company dependent on any single customer or region?

No single customer has historically accounted for 5% or more of revenues. Geographically, however, the business is concentrated in Asia, which generated about 57% of total revenues in 2005 (2.24 billion of 3.90 billion). Mainland China and Hong Kong each represented more than 10% of total revenues. Because the company operates in 58 countries, it is also exposed to currency controls and foreign political risk.

Why is the company buying back stock, and how much capacity remains?

The company adopted a policy in 2005 of repurchasing shares to offset dilution from option exercises, so it spent about $127 million on buybacks in 2005 versus $29 million in 2004. At year-end, roughly 9.47 million shares remained authorized under the non-discretionary plan and the discretionary plan has no fixed limit, since it targets 100 million shares outstanding.

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

The company had no long-term debt and no short-term borrowings at December 31, 2005. Its contingent liabilities total about $56 million in standby letters of credit and guarantees, mainly supporting carrier credit and foreign duty and VAT deferrals, and the underlying obligations are already recorded on subsidiary books. It reported no material off-balance-sheet arrangements.

EXPD 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2006. Cited figures are marked; the original filing is the authoritative source.

Expeditors International of Washington (EXPD) closed 2005 with a strong year of growth in its global logistics business.

Total revenues rose 18% to $3.90 billion^a from $3.32 billion, while net revenues (revenues less freight consolidation costs) grew 17% to $1.06 billion. Operating income increased 26% to $304.5 million, and net earnings rose 40% to $218.6 million, or $1.96 per diluted share. Growth was broad-based across airfreight (net revenues up 12%), ocean freight (up 23%) and customs brokerage (up 18%), and same-store net revenue growth of 16% suggests the expansion is largely organic, supported by 12 new full-service offices opened in 2005.

The result was helped by a one-time $21.7 million^b tax benefit under IRC Section 965 tied to a commitment to spend roughly $105 million on qualified capital expenditures, which lowered the effective tax rate to 29.6% from 35.4%. Excluding this benefit, earnings growth was still robust but less dramatic. Management also flagged that the 2006 adoption of SFAS 123R will materially affect reported results, since stock option expense will now be recognized and salary costs as a percentage of net revenues may become more volatile.

The balance sheet remains very conservative, with no long-term debt, $464 million^c in cash and short-term investments, and $914 million in shareholders' equity. Operating cash flow improved to $280 million.

Management is returning capital through dividends (raised to $0.30^d per share) and share repurchases of about $127 million, and expects 2006 capital expenditures of roughly $165 million, including real estate purchases and development. Key risks include dependence on asset-based carriers, currency controls, customer concentration in retail and just-in-time supply chains, and the cost of evolving security regulations.

02—Key points

Key Highlights

Total revenues grew 18% to $3.90 billion in 2005; net revenues grew 17% to $1.06 billion, with operating income up 26% to $304.5 million.
Diluted EPS rose to $1.96 from $1.41 (up 39%); net earnings reached $218.6 million, though about $22 million of this came from a one-time IRC 965 tax benefit.
Same-store net revenue growth of 16% and operating income growth of 26% indicate strong internal, organic expansion rather than acquisition-driven growth.
Ocean freight net revenues surged 23% (Asia up 31%), while airfreight net revenues rose 12% and customs brokerage net revenues rose 18%.
Balance sheet is strong with no long-term debt, $464 million in cash and short-term investments, and operating cash flow of $280 million.
Shareholder returns increased: semi-annual dividend raised to $0.15 (total $0.30 per share for 2005), and the company repurchased about $127 million of stock under a policy to offset option-driven dilution.
2006 outlook includes capital expenditures of about $165 million and the adoption of SFAS 123R, which will materially affect reported earnings and expense volatility.

03—Questions

Frequently Asked Questions

How much of 2005's earnings growth was driven by the one-time tax benefit?
The company recorded a one-time $21.7 million tax benefit under IRC Section 965 in Q4 2005, worth about $0.19 per share. It lowered the effective tax rate to 29.6% from 35.4%. Without it, net earnings growth would have been roughly 26% rather than 40%. The benefit is tied to a plan requiring about $105 million of qualified capital expenditures over the next two to three years.
What is the outlook for 2006 expenses and earnings quality?
Management expects the adoption of SFAS 123R, which requires expensing employee stock options at fair value, to have a material impact on the balance sheet, results of operations, EPS and cash flow statement. It also expects salaries and related costs as a percentage of net revenues to become more volatile, so the historically stable compensation ratio of about 53% may not hold in 2006.
Is the company dependent on any single customer or region?
No single customer has historically accounted for 5% or more of revenues. Geographically, however, the business is concentrated in Asia, which generated about 57% of total revenues in 2005 (2.24 billion of 3.90 billion). Mainland China and Hong Kong each represented more than 10% of total revenues. Because the company operates in 58 countries, it is also exposed to currency controls and foreign political risk.
Why is the company buying back stock, and how much capacity remains?
The company adopted a policy in 2005 of repurchasing shares to offset dilution from option exercises, so it spent about $127 million on buybacks in 2005 versus $29 million in 2004. At year-end, roughly 9.47 million shares remained authorized under the non-discretionary plan and the discretionary plan has no fixed limit, since it targets 100 million shares outstanding.
Does the company carry significant debt or off-balance-sheet risk?
The company had no long-term debt and no short-term borrowings at December 31, 2005. Its contingent liabilities total about $56 million in standby letters of credit and guarantees, mainly supporting carrier credit and foreign duty and VAT deferrals, and the underlying obligations are already recorded on subsidiary books. It reported no material off-balance-sheet arrangements.

04—Continue

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