01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong 2008 on the top line and bottom line despite a sharp global downturn in the back half of the year.
Total revenues rose 8% to $5.63 billiona and net revenues (revenues less freight consolidation costs, the metric management prefers) rose 10% to $1.60 billion. Net earnings grew 12% to $301.0 million and diluted EPS rose 13% to $1.37. Operating income reached $473.1 million, and the operating margin on net revenue held at 29%, flat with 2007, while the company held overhead costs at 71% of net revenue.
Management was candid that volumes weakened materially in the second half of 2008. Airfreight and ocean freight volumes fell versus 2007 in that period, and airfreight volumes in the second half were below the first half, which management described as unprecedented in the company's history. Growth was therefore driven largely by higher net revenue per unit, with airfreight net revenue per kilo up 12%b against a 4% decline in tonnage.
Management said it cannot predict the ongoing impact of the downturn. Cash generation was solid, with operating cash flow of $409 millionc and a balance sheet holding $741 million in cash and no long-term debt. The main investor overhang is legal.
The company is cooperating with a U.S. Department of Justice investigation of air cargo freight forwarders, with roughly $14 milliond of cumulative costs incurred so far. It is also responding to a European Commission investigation of freight forwarders, and it is a defendant in a federal antitrust class action in New York.
Management states it cannot estimate the range of potential loss, and fines could be material to financial position, results and cash flows. The company also raised its dividend and expanded its buyback authorization to 40 million shares, signaling confidence in its capital position.
02—Key points
Key Highlights
- Total revenues increased 8% to $5.63 billion; net revenues increased 10% to $1.60 billion.
- Net earnings rose 12% to $301.0 million; diluted EPS rose 13% to $1.37, with operating margin on net revenue steady at 29%.
- Volumes weakened in the second half of 2008, which management called unprecedented; airfreight tonnage fell 4% for the full year, with growth driven by higher net revenue per kilo (up 12%).
- Strong cash position: $741 million in cash and short-term investments of $742 million, no long-term debt, and operating cash flow of $409 million (up from $313 million).
- Material legal exposure: a DOJ investigation of air cargo freight forwarders, a European Commission information request and investigation, and a federal antitrust class action; fines could be material and the loss range cannot be estimated.
- Shareholder returns: semi-annual dividend raised to $0.16 per share (from $0.14), and buyback authorization increased to 40 million shares in February 2009.
- Leadership transition: Bradley Powell joined as CFO in October 2008 and assumes the principal financial officer role on March 15, 2009.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Expeditors International kept $0.05.
- Revenue$5.63B100.0%
- Cost of revenue−$4.03B71.5%
- Gross profit$1.60B28.5%
- Operating costs−$1.13B20.1%
- Operating income$473.1M8.4%
- Interest, other & tax−$172.1M3.1%
- Net income$301.0M5.3%
Where FY2008 revenue went
$5.63B- Cost of revenue: $4.03B, 72% of revenue
- Operating costs: $1.13B, 20% of revenue
- Net income: $301.0M, 5.3% of revenue
- Interest, other & tax: $172.1M, 3.1% of revenue
Kept 5.3% as net incomeNet income $301.0M · 5.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $5.63B$5.24B | +7.6% |
| Gross Profit | $1.60B— | — |
| Operating Expenses | $5.16B$4.81B | +7.3% |
| Operating Income | $473.14M$423.40M | +11.7% |
| Interest Expense | $183K-$45K | +506.7% |
| Net Income | $301.01M$269.15M | +11.8% |
| EPS (Basic) | $1.41$1.26 | +11.9% |
| EPS (Diluted) | $1.37$1.21 | +13.2% |
| Shares Outstanding (Basic) | 212.76M213.31M | −0.3% |
| Shares Outstanding (Diluted) | 219.17M221.80M | −1.2% |
05—Questions
Frequently Asked Questions
How did Expeditors perform financially in 2008?
Revenue grew 8% to $5.63 billion and net revenue grew 10% to $1.60 billion. Net earnings rose 12% to $301.0 million, and diluted EPS was $1.37 versus $1.21 in 2007. Operating income rose 12% to $473.1 million and the operating margin on net revenue stayed at 29%.
Is the downturn affecting the company's volumes?
Yes. Management stated that air and ocean freight volumes were lower in the second half of 2008 than in the same period of 2007, and airfreight volumes in the second half were below the first half. Full-year airfreight tonnage fell 4%, and growth came mainly from higher net revenue per unit. Management said it cannot predict the ongoing impact of the downturn.
What is the biggest legal risk to investors?
The U.S. DOJ investigation into alleged anti-competitive behavior among air cargo freight forwarders is the most significant. The company has incurred about $14 million in cumulative costs. Fines or penalties could be material to financial position, results of operations and cash flows. The European Commission investigation and a U.S. antitrust class action add to the exposure, and management said it cannot estimate the potential loss.
Is the company financially strong enough to handle these risks?
The balance sheet is strong. The company ended 2008 with $741 million in cash, no long-term debt, $903 million in working capital, and shareholders' equity of $1.37 billion. Operating cash flow was $409 million. Management believes cash, bank lines and operating cash flow will cover capital and liquidity needs for the foreseeable future.
How is the company returning capital to shareholders?
In 2008 the company paid dividends of $0.32 per share totaling $68 million and repurchased $154 million of stock. In February 2009 the board raised the dividend to $0.16 semi-annually on a per-payment basis and increased the non-discretionary buyback authorization to 40 million shares. The company is also seeking to limit share count growth from option exercises through its discretionary repurchase plan.
06—Continue