01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a difficult fiscal 2009 as the global downturn sharply reduced freight volumes.
Total revenues fell 27% to $4.09 billiona from $5.63 billion, and net revenues (revenues less freight consolidation costs, the metric management considers most meaningful) fell 14% to $1.38 billion. Operating income declined 19% to $385 million, and net earnings attributable to shareholders dropped 20% to $240 million, or $1.11 per diluted share versus $1.37 in 2008. Management described these results as unprecedented in the company's history.
Airfreight net revenues fell 15%b, ocean freight net revenues fell 18%, and customs brokerage net revenues fell 10%. Management also noted that carriers removed capacity and raised prices in the second half of 2009, which the company absorbed before passing costs to customers, pressuring margins. The balance sheet remains very strong.
The company ended 2009 with $927 millionc in cash and short-term investments, no long-term debt, and shareholders' equity of $1.55 billion. Operating cash flow was $331 million, and the company continued to return capital through semi-annual dividends (totaling $0.38 per share) and share repurchases. The company's cost structure is largely variable, and its incentive-based compensation fell 19% in line with profits, which management presents as a built-in cushion during downturns.
The key risk for investors is legal exposure. The company is under a U.S. Department of Justice investigation of air cargo freight forwarders, received a European Commission Statement of Objections on February 10, 2010, and is a defendant in a U.S. antitrust class action.
Management could not estimate potential losses, and it warned that fines or penalties could have a material impact on financial results. Legal costs are expected to rise in 2010.
02—Key points
Key Highlights
- Revenue declined 27% to $4.09 billion, and net revenues declined 14% to $1.38 billion, reflecting the sharp drop in global air and ocean freight volumes.
- Operating income fell 19% to $385 million, with operating margin on net revenues slipping to 28% from 29%. Diluted EPS was $1.11, down from $1.37.
- Airfreight tonnage fell 13%, and ocean freight consolidation volume fell 17%. Carrier capacity cuts and price increases in the second half of 2009 were absorbed by the company before customer pricing caught up.
- The company holds $927 million in cash and short-term investments with no long-term debt, providing substantial financial flexibility.
- Management reported that 2009 was the first year since 1984 in which operating income declined year over year, and bonuses for field and corporate management fell 19%, reflecting the performance-linked compensation model.
- The company faces significant legal risk from a DOJ investigation, an EC Statement of Objections (February 2010), and an antitrust class action. Management could not estimate potential losses, and legal costs are expected to increase in 2010.
- Shareholder returns continued through dividends of $0.38 per share (up from $0.32) and share repurchases, and the company's common stock trades on NASDAQ under EXPD.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Expeditors International kept $0.06.
- Revenue$4.09B100.0%
- Cost of revenue−$2.71B66.2%
- Gross profit$1.38B33.8%
- Operating costs−$997.8M24.4%
- Operating income$385.0M9.4%
- Interest, other & tax−$144.8M3.5%
- Net income$240.2M5.9%
Where FY2009 revenue went
$4.09B- Cost of revenue: $2.71B, 66% of revenue
- Operating costs: $997.8M, 24% of revenue
- Net income: $240.2M, 5.9% of revenue
- Interest, other & tax: $144.8M, 3.5% of revenue
Kept 5.9% as net incomeNet income $240.2M · 5.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $4.09B$5.63B | −27.4% |
| Gross Profit | $1.38B$1.60B | −13.8% |
| Operating Expenses | $3.71B$5.16B | −28.2% |
| Operating Income | $385.00M$473.14M | −18.6% |
| Interest Expense | $499K$183K | +172.7% |
| Net Income | $240.22M$301.01M | −20.2% |
| EPS (Basic) | $1.13$1.41 | −19.9% |
| EPS (Diluted) | $1.11$1.37 | −19.0% |
| Shares Outstanding (Basic) | 212.11M212.76M | −0.3% |
| Shares Outstanding (Diluted) | 216.53M219.17M | −1.2% |
05—Questions
Frequently Asked Questions
How much did Expeditors' revenue and earnings decline in 2009?
Total revenues fell about 27% to $4.09 billion from $5.63 billion. Net revenues, which management considers the better measure of the business, fell 14% to $1.38 billion. Net earnings attributable to shareholders fell about 20% to $240 million, and diluted EPS fell to $1.11 from $1.37.
Is the company's balance sheet strong enough to weather the downturn?
Yes. At year-end 2009 the company had $927 million in cash and short-term investments, no long-term debt, and $1.55 billion in shareholders' equity. Operating cash flow was $331 million. Most of its cash sits in non-U.S. subsidiaries, and repatriation may be subject to foreign exchange controls.
What is the biggest risk to investors from the legal matters?
The company is under a DOJ investigation of air cargo freight forwarders, faces a European Commission Statement of Objections, and is a defendant in a U.S. antitrust class action. Management said it cannot estimate potential losses. Fines or an adverse judgment could materially affect financial position, results, and cash flows, and legal costs are expected to rise in 2010.
Why did margins come under pressure in the second half of 2009?
Carriers removed significant capacity and raised airfreight and ocean freight prices, particularly in Asia and on Pacific North America lanes. The company absorbed these increases before negotiating pass-throughs with customers, which compressed net revenue yields in the short term. Management said this may challenge its ability to maintain historical unitary profitability.
Does the company's cost structure cushion downturns?
Partly. Incentive-based compensation is tied to branch profitability, so bonuses fell 19% in 2009 alongside operating income. However, base salaries are fixed in the short term, and salaries as a percentage of net revenue rose about 208 basis points excluding stock compensation, as management chose to retain staff during the downturn.
06—Continue