01—Abstract
Summary
Summary of the 10-K filed February 27, 2013. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) closed fiscal 2012 with a clear earnings and margin reset.
Total revenues rose to $5.98 billiona from $6.15 billion in 2011 (down about 3%), while net revenues (revenues less transportation costs) fell 4% to $1.82 billion from $1.90 billion. Net earnings attributable to shareholders declined 14% to $333 million, and diluted EPS fell to $1.57 from $1.79. Operating income dropped 14% to $531 million, and operating margin on net revenues contracted from 33% to 29%.
Management attributes the pressure to lower airfreight tonnage (down 6%b), a 7% decline in airfreight net revenue per kilo as carriers cut capacity, and an inability to pass carrier rate increases through to customers in a timely manner. Ocean consolidation net revenue fell 7%, and salaries and related costs rose slightly even as revenue declined, which compressed margins further. The balance sheet remains very strong.
The company had no long-term debt, cash and equivalents of $1.26 billionc, and working capital of $1.5 billion. Operating cash flow was $370 million, down from $457 million. Management returned substantial capital to shareholders: it repurchased $302 million of stock (roughly 8 million shares, including discretionary buybacks to shrink the share count) and paid $117 million in dividends, with the semi-annual dividend raised to $0.28 per share from $0.25.
Capital expenditures were $48 milliond, with about $100 million guided for 2013, including real estate development. For investors, the key takeaways are a cyclical earnings downturn driven by air and ocean capacity dynamics rather than balance-sheet stress, along with a continued policy of returning excess cash. Risks flagged include carrier financial instability, pricing pressure from customers who bid out logistics contracts, a European Commission anti-competition fine of about $5.5 million, and foreign currency exposure, with most revenue generated outside the United States.
02—Key points
Key Highlights
- Total revenues fell 3% to $5.98B and net revenues fell 4% to $1.82B; the decline was concentrated in airfreight, where net revenues dropped 12% to $617M on a 6% tonnage decline and a 7% drop in net revenue per kilo.
- Net earnings attributable to shareholders fell 14% to $333M; diluted EPS was $1.57 versus $1.79 in 2011, and operating margin on net revenues compressed from 33% to 29%.
- Customs brokerage and other services was the most resilient segment, with net revenues up 2% to $774M and now the largest contributor at 42% of net revenues.
- Balance sheet is net cash: $1.26B in cash and equivalents, no long-term debt, and $1.5B in working capital.
- Operating cash flow declined to $370M from $457M, mainly due to working capital changes and lower earnings.
- Shareholder returns remained substantial: $302M in buybacks (about 8.0M shares) and $117M in dividends, with the semi-annual dividend raised to $0.28 from $0.25.
- Management guides 2013 capex to about $100M, including real estate development, and flags continued carrier capacity constraints and pricing pressure as headwinds.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Expeditors International kept $0.06.
- Revenue$5.99B100.0%
- Cost of revenue−$4.17B69.6%
- Gross profit$1.82B30.4%
- Operating costs−$1.29B21.6%
- Operating income$530.8M8.9%
- Interest, other & tax−$197.4M3.3%
- Net income$333.4M5.6%
Where FY2012 revenue went
$5.99B- Cost of revenue: $4.17B, 70% of revenue
- Operating costs: $1.29B, 22% of revenue
- Net income: $333.4M, 5.6% of revenue
- Interest, other & tax: $197.4M, 3.3% of revenue
Kept 5.6% as net incomeNet income $333.4M · 5.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 27, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $5.99B$6.16B | −2.7% |
| Gross Profit | $1.82B$1.90B | −3.8% |
| Operating Expenses | $5.46B$5.54B | −1.5% |
| Operating Income | $530.80M$618.33M | −14.2% |
| Interest Expense | $1.25M$970K | +29.0% |
| Net Income | $333.36M$385.68M | −13.6% |
| EPS (Basic) | $1.58$1.82 | −13.2% |
| EPS (Diluted) | $1.57$1.79 | −12.3% |
| Shares Outstanding (Basic) | 210.42M212.12M | −0.8% |
| Shares Outstanding (Diluted) | 211.94M215.03M | −1.4% |
05—Questions
Frequently Asked Questions
Why did Expeditors' earnings decline in 2012 despite a relatively stable revenue base?
Net revenues fell 4% and operating expenses did not flex down. Airfreight was the main drag: tonnage fell 6% as shippers shifted to ocean and deferred freight, and net revenue per kilo fell 7% because carriers cut capacity and the company could not pass buy-rate increases through to customers quickly enough. Salaries and related costs rose slightly even as revenue declined, pushing operating margin down to 29% from 33%.
Is Expeditors financially strong enough to weather a prolonged freight downturn?
Yes, based on this filing. The company carries no long-term debt and holds $1.26B in cash and equivalents, against total liabilities of roughly $0.9B. Management states that cash and operating cash flow are sufficient for at least the next 12 months and beyond. Its compensation model also ties bonuses to operating profit, which automatically flexes variable costs when earnings fall.
How is management returning capital to shareholders, and is the dividend sustainable?
In 2012 the company repurchased $302M of stock under two plans, one funded by option-exercise proceeds and one discretionary plan aimed at reducing the share count to 200 million. It paid $117M in dividends ($0.56 per share for the year) and raised the semi-annual rate to $0.28 from $0.25. At 2012 earnings, the dividend was covered by net earnings (about 35% payout), and the company has ample cash to fund it.
What are the most significant risks investors should monitor?
Key risks include carrier financial instability and capacity decisions by airlines and ocean lines, which affect both pricing and the company's ability to protect margins; customers who put logistics business out to bid, which pressures pricing; a European Commission anti-competition fine of about €4.14M ($5.5M); international tax audits and changing rules; currency exposure, since most revenue is earned outside the U.S.; and increasing global security regulation that may raise compliance costs.
What does the company expect for 2013?
The filing gives limited formal guidance. Management says that absent meaningful improvement in airfreight and ocean conditions, similar trends (pressured yields, lower airfreight tonnage, and margin compression) are expected to continue in the near term. The company projects 2013 capital expenditures of about $100M and states it does not expect material environmental capex. It also has a policy against issuing financial forecasts.
06—Continue