01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong 2011 in its 10-K filed February 28, 2012.
Total revenues rose 3% to $6.15 billiona, while net revenues (revenues less transportation costs, the company's preferred measure of profitability) grew 12% to $1.90 billion. Operating income increased 13% to $618 million, and net earnings attributable to shareholders rose 12% to $386 million, or $1.79 per diluted share. Operating margin on net revenues improved to 33% from 32% a year earlier, driven by higher net revenue per kilo in airfreight and per container in ocean freight, which the company attributed to excess carrier capacity creating buying opportunities, particularly in Asia.
The balance sheet remains very conservative. The company had $1.29 billionb in cash and short-term investments, no long-term debt, and total shareholders' equity of $2.0 billion. Operating cash flow was $457 million, and the board raised the semi-annual dividend to $0.25 per share from $0.20, bringing the annual payout to $0.50.
Management also noted that the first-quarter-weak seasonal pattern was disrupted in 2011, with airfreight volumes declining after Q1 and the expected fourth-quarter peak season failing to materialize, and that lower underlying trade flows continued into January 2012. The key investor concern is legal and regulatory exposure. The company is cooperating with a U.S. Department of Justice investigation into air cargo freight forwarders and faces a European Commission Statement of Objections alleging anticompetitive conduct, with a State of Play meeting scheduled for March 2012.
Management has recorded no accrual and cannot estimate potential fines, which could be material to any given quarter or year. Separately, the company agreed on February 28, 2012 to settle a U.S. antitrust class action, assigning 70%c of any related air cargo proceeds to plaintiffs, which management does not expect to be material to the financial statements.
02—Key points
Key Highlights
- Net revenues grew 12% to $1.90 billion, with airfreight up 9%, ocean freight up 13%, and customs brokerage up 14%.
- Operating income rose 13% to $618.3 million, and operating margin on net revenues improved to 33% from 32%.
- Diluted EPS increased to $1.79 from $1.59, and net earnings attributable to shareholders reached $385.7 million.
- Balance sheet is net cash: $1.29 billion in cash and short-term investments, no long-term debt, and $2.0 billion in shareholders' equity.
- Operating cash flow rose to $457 million, and the semi-annual dividend was raised to $0.25 per share ($0.50 annually, up from $0.40).
- Airfreight tonnage was flat and volumes weakened after Q1 2011, with the expected Q4 peak season not materializing; management noted lower trade flows continuing into January 2012.
- Material legal exposure remains: DOJ air cargo investigation and European Commission Statement of Objections, with no accrual recorded and fines not estimable.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Expeditors International kept $0.06.
- Revenue$6.16B100.0%
- Cost of revenue−$4.27B69.2%
- Gross profit$1.90B30.8%
- Operating costs−$1.28B20.7%
- Operating income$618.3M10.0%
- Interest, other & tax−$232.6M3.8%
- Net income$385.7M6.3%
Where FY2011 revenue went
$6.16B- Cost of revenue: $4.27B, 69% of revenue
- Operating costs: $1.28B, 21% of revenue
- Net income: $385.7M, 6.3% of revenue
- Interest, other & tax: $232.6M, 3.8% of revenue
Kept 6.3% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $6.16B$5.97B | +3.3% |
| Gross Profit | $1.90B$1.69B | +12.0% |
| Operating Expenses | $5.54B$5.42B | +2.3% |
| Operating Income | $618.33M$547.23M | +13.0% |
| Interest Expense | $970K$576K | +68.4% |
| Net Income | $385.68M$344.17M | +12.1% |
| EPS (Basic) | $1.82$1.62 | +12.3% |
| EPS (Diluted) | $1.79$1.59 | +12.6% |
| Shares Outstanding (Basic) | 212.12M212.28M | −0.1% |
| Shares Outstanding (Diluted) | 215.03M216.45M | −0.7% |
05—Questions
Frequently Asked Questions
How did Expeditors perform financially in 2011?
Net revenues increased 12% to $1.90 billion, operating income rose 13% to $618 million, and diluted EPS grew to $1.79 from $1.59. Gains came mainly from higher net revenue per kilo in airfreight and per container in ocean freight, helped by excess carrier capacity that created favorable buying opportunities.
Is Expeditors financially strong enough to fund growth and shareholder returns?
Yes. The company held $1.29 billion in cash and short-term investments with no long-term debt at year-end 2011. It generated $457 million in operating cash flow, funded $78 million in capital expenditures, paid $106 million in dividends, and repurchased $112 million of stock. Planned 2012 capital expenditures are about $100 million, including real estate development.
What is the biggest risk to investors from the current filing?
Antitrust investigations are the main risk. The DOJ is investigating air cargo freight forwarders, and the European Commission has issued a Statement of Objections covering South China/Hong Kong to European Economic Area airfreight lanes. Fines could be material to a given quarter or year, but the company cannot estimate them and has accrued nothing. A separate U.S. class action is being settled with no material financial impact expected.
Why does Expeditors use net revenues instead of total revenues?
Total revenues include the carriers' transportation charges when the company acts as a freight consolidator, which inflates the figure. Net revenues (revenues minus transportation expenses) better reflect the value the company adds through its services. In 2011, total revenues rose 3% while net revenues rose 12%, so the two measures tell very different growth stories.
How seasonal and volatile is the business?
Results are seasonal: the first quarter is typically the weakest and the third and fourth quarters the strongest. However, the 2011 peak season did not materialize, and quarterly airfreight volumes declined after Q1. Because many customers ship near quarter-end, shortfalls can surface late in a quarter. Management also warns that carrier capacity swings and pricing volatility could affect its ability to maintain historical unitary profitability.
06—Continue