01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong fiscal 2007 with total revenues of $5.24 billiona (up 13% from $4.63 billion) and net earnings of $269.2 million (up 14.5% from $235.1 million).
Diluted EPS rose to $1.21b from $1.06. Net revenues (revenues less freight consolidation costs), the company's preferred measure of underlying business strength, grew 13% to $1.45 billion, and operating income climbed 13% to $423.4 million, with the operating margin on net revenues holding at 29%. Growth was driven by airfreight tonnage (+8% globally), ocean freight container volume (+15%), and a 16% increase in customs brokerage and other services.
Management highlights an organic growth strategy supported by incentive-based compensation for branch managers. The balance sheet is conservative: the company carried $575 millionc in cash and short-term investments, no long-term debt, and working capital of $765 million. Operating cash flow was $313 million, down from $333 million, mainly because receivables grew faster than payables.
The company returned capital through $59.7 milliond in dividends ($0.28 per share, up from $0.22) and $207.6 million in share repurchases, which were designed to offset dilution from option exercises. The primary risk for investors is legal. In October 2007 the U.S. Department of Justice subpoenaed the company in an investigation of alleged anti-competitive behavior among air cargo freight forwarders, and in January 2008 Expeditors was named as one of eight defendants in a federal antitrust class action in New York.
The company has incurred about $3.7 million in legal costs so far and says fines or penalties are possible. The filing does not quantify a potential loss, so the outcome is a key uncertainty. Management also flagged 2008 capital expenditures above $85 million and a CFO transition, with the President and COO serving as acting CFO.
02—Key points
Key Highlights
- Revenue rose 13% to $5.24 billion and net earnings rose 14.5% to $269.2 million, with diluted EPS of $1.21 versus $1.06 in 2006.
- Net revenues grew 13% to $1.45 billion, and operating margin on net revenues held at 29% (operating income of $423.4 million).
- Airfreight net revenues rose 12%, supported by 8% global tonnage growth, while ocean freight volumes rose 15% but ocean yields fell 8%.
- Customs brokerage and other services net revenues rose 16%, the fastest-growing segment and now 40% of net revenues.
- Balance sheet is strong: $575 million in cash and short-term investments, no long-term debt, and $765 million in working capital.
- Shareholder returns included $207.6 million in buybacks and dividends raised to $0.28 per share (semi-annual $0.14) from $0.22.
- Material legal exposure: a DOJ antitrust investigation of air cargo forwarders and a federal class action in New York, with legal costs of $3.7 million to date and no quantified loss estimate.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $5.24B |
| Operating Expenses | $4.81B |
| Operating Income | $423.40M |
| Interest Expense | -$45K |
| Net Income | $269.15M |
| EPS (Basic) | $1.26 |
| EPS (Diluted) | $1.21 |
| Shares Outstanding (Basic) | 213.31M |
| Shares Outstanding (Diluted) | 221.80M |
05—Questions
Frequently Asked Questions
What drove the increase in earnings in 2007?
Higher volumes were the main driver. Global airfreight tonnage rose 8% and ocean container volume rose 15%, and customs brokerage net revenues grew 16%. Net revenues grew 13%, and operating income grew at roughly the same rate because overhead grew in line with revenue. Interest income also rose by about $4 million on higher cash balances and rates.
How significant is the DOJ antitrust investigation and class action?
The filing does not quantify potential exposure. The company has incurred about $3.7 million in legal costs, and it expects further costs. The DOJ investigation could lead to fines or penalties if it concludes the company engaged in anti-competitive behavior. Expeditors is one of eight defendants in the January 2008 class action, which has not been certified, and the company says the allegations are without merit. Shareholder class actions and derivative suits are also possible.
Why did operating cash flow decline despite higher earnings?
Operating cash flow fell to $313 million from $333 million mainly because accounts receivable grew faster than accounts payable. Net earnings increased, but a smaller increase in taxes payable also contributed. The company notes that its seasonal working-capital cycle, which builds receivables in peak season, regularly affects cash flow.
What is the company's capital allocation strategy?
Expeditors uses excess cash to fund organic growth, dividends, and share buybacks. Capital expenditures were $83 million in 2007, including $35 million for a Hong Kong office, and are expected to exceed $85 million in 2008, to be funded with cash. Buybacks are funded from option-exercise proceeds to prevent share count growth, and the company repurchased 4.7 million shares in 2007 for $208 million.
Is there any leadership change that investors should know about?
Yes. Effective January 1, 2008, R. Jordan Gates became President and Chief Operating Officer while remaining acting Chief Financial Officer until a permanent replacement is named. Timothy Barber became President of Global Sales and Marketing on the same date. Investors should watch for the CFO appointment, since the company has no permanent CFO in the period covered by this report.
06—Continue