01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong rebound in fiscal 2010 following the 2009 downturn.
Revenues rose 46% to $5.97 billiona from $4.09 billion, and net revenues (revenues less transportation expenses, the metric management emphasizes) increased 22% to $1.69 billion. Operating income climbed 42% to $547 million, with the operating margin on net revenues expanding to 32% from 28%. Net earnings attributable to shareholders reached $344 million, or $1.59 diluted EPS, versus $1.11 in 2009.
Airfreight tonnage rose 35%b and ocean consolidation volume rose 20%, reflecting the global economic recovery that began in late 2009. Management noted that the rebound was accompanied by tight carrier capacity and rising buy rates, which the company absorbs in the short term before passing them to customers. The balance sheet remains very conservative.
The company had no long-term debt, cash and short-term investments of $1.085 billionc, and shareholders' equity of $1.74 billion. Operating cash flow was $396 million, and the company repurchased about $246 million of stock while paying $0.40 per share in dividends. Management projects 2011 capital expenditures of roughly $117 million, including real estate development in London and Beijing.
The principal risk for investors is legal. Expeditors is under investigation by the U.S. Department of Justice, the European Commission, and Brazil's Ministry of Justice over alleged anti-competitive conduct among freight forwarders, and it is a defendant in a federal antitrust class action in New York.
The company has spent about $15 milliond on these matters since 2007 but cannot estimate a potential loss, and management states that fines could be material. The company also acknowledges that its results depend heavily on the financial health of asset-based carriers, which remain highly leveraged.
02—Key points
Key Highlights
- Revenue grew 46% to $5.97B in 2010 and net revenues grew 22% to $1.69B, driven by a 35% increase in airfreight tonnage and a 20% increase in ocean consolidation volume.
- Operating income rose 42% to $547M, and operating margin on net revenues improved to 32% from 28% as salary costs fell to 53% of net revenues from 56%.
- Diluted EPS of $1.59 compares with $1.11 in 2009 and $1.37 in 2008, and the effective tax rate fell to 38.9% from 40.3%.
- The balance sheet is net cash: $1.085B in cash and short-term investments, no long-term debt, and $1.74B in shareholders' equity.
- Operating cash flow was $396M, and the company returned capital through $246M in share repurchases and $85M in dividends ($0.40 per share).
- Material legal exposure remains from DOJ, European Commission, and Brazilian antitrust investigations plus a federal class action, with no estimable loss range; the company has incurred about $15M in related costs since 2007.
- Management expects 2011 capital expenditures of about $117M, including new office/warehouse facilities in London and Beijing, a notable step-up from $42M in 2010.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Expeditors International kept $0.06.
- Revenue$5.97B100.0%
- Cost of revenue−$4.27B71.6%
- Gross profit$1.69B28.4%
- Operating costs−$1.15B19.2%
- Operating income$547.2M9.2%
- Interest, other & tax−$203.1M3.4%
- Net income$344.2M5.8%
Where FY2010 revenue went
$5.97B- Cost of revenue: $4.27B, 72% of revenue
- Operating costs: $1.15B, 19% of revenue
- Net income: $344.2M, 5.8% of revenue
- Interest, other & tax: $203.1M, 3.4% of revenue
Kept 5.8% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $5.97B$4.09B | +45.8% |
| Gross Profit | $1.69B$1.38B | +22.4% |
| Operating Expenses | $5.42B$3.71B | +46.2% |
| Operating Income | $547.23M$385.00M | +42.1% |
| Interest Expense | $576K$499K | +15.4% |
| Net Income | $344.17M$240.22M | +43.3% |
| EPS (Basic) | $1.62$1.13 | +43.4% |
| EPS (Diluted) | $1.59$1.11 | +43.2% |
| Shares Outstanding (Basic) | 212.28M212.11M | +0.1% |
| Shares Outstanding (Diluted) | 216.45M216.53M | 0.0% |
05—Questions
Frequently Asked Questions
What drove the strong 2010 earnings recovery?
The recovery reflected the global economic rebound that began in Q4 2009. Airfreight tonnage rose 35% and ocean consolidation volume rose 20%, which lifted net revenues across all three service lines. Operating leverage was also strong: salaries and related costs grew only about 16% excluding stock compensation, well below the growth in net revenues, which lifted operating margins.
How much legal risk does Expeditors face, and could it be material?
The risk is significant and unquantified. The company is subject to a DOJ investigation of air cargo forwarders, a European Commission Statement of Objections, a Brazilian administrative proceeding, and a U.S. antitrust class action alleging price fixing of surcharges. Management says fines or judgments could have a material impact on financial position, results, and cash flows, and it cannot estimate a loss range. Costs were about $1M in 2010 and about $15M cumulatively since 2007.
Is the company's balance sheet a source of financial strength?
Yes. Expeditors carried no long-term debt at year-end 2010 and held $1.085B in cash and short-term investments, roughly 40% of total assets. Its $22M in unsecured bank lines was undrawn, and it had $91M in standby letters of credit and guarantees, mostly backing obligations of foreign subsidiaries to carriers and customs authorities.
What are the main risks to future earnings?
The company is a non-asset-based forwarder, so it depends on airlines and steamship lines. Management warns that carriers are highly leveraged, have reduced capacity, and are raising rates, and that the company often absorbs buy-rate increases before it can pass them to customers. Its historical unitary profitability could therefore be challenged. Other risks include foreign currency and currency control rules, a concentration of revenue outside the U.S. (about 37% of total revenue from China and Hong Kong), and the sensitivity of revenue timing to peak-season demand and to late-quarter shipments.
How does the company return capital to shareholders?
Expeditors pays semi-annual dividends, totaling $0.40 per share in 2010 versus $0.38 in 2009. It also repurchases stock under two plans. The non-discretionary plan uses proceeds from option exercises, and the discretionary plan limits share count growth. In 2010 the company repurchased about 5.5 million shares for $246M, and it had about 30 million shares of authorization remaining under the discretionary plan at year-end.
06—Continue