01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a solid but lower-earnings 2016 as the global freight market remained oversupplied and pricing-pressured.
Total revenues fell about 8% to $6.10 billiona from $6.62 billion, driven by lower airfreight and ocean freight sell rates that passed through lower carrier buy rates. The metric management and investors focus on, non-GAAP net revenues, declined about 1% to $2.16 billion, with customs brokerage and other services (up 4%) offsetting flat ocean freight net revenue and a 7% drop in airfreight net revenue. Diluted EPS fell to $2.36 from $2.40, and net earnings attributable to shareholders declined 6% to $430.8 million.
Operating income dropped 7% to $670 millionb, though operating margin on net revenues held near 31%. Capital allocation remained shareholder-friendly. The company returned roughly $483 million to shareholders through dividends ($0.80 per share, up from $0.72) and share repurchases of about $338 million, and the diluted share count fell roughly 4% to 182.7 million.
Management highlighted a strong balance sheet with $974 millionc of cash, no long-term debt, and operating cash flow of $529 million. Forward-looking items include planned 2017 capital expenditures of about $110 million, the pending sale of Miami land and buildings with a book value of $80 million, and the adoption of new stock compensation and revenue recognition accounting rules that may add earnings volatility. Investors should weigh the cash-rich, organic-growth model against ongoing pricing pressure in airfreight and ocean freight and the risk of carrier instability.
02—Key points
Key Highlights
- Total revenues declined about 8% to $6.10 billion (2015: $6.62 billion), reflecting lower sell rates in airfreight and ocean freight as carrier capacity was oversupplied.
- Net revenues (non-GAAP) were roughly flat at $2.16 billion, down 1% from $2.19 billion; customs brokerage and other services rose 4% to $924 million and now represent 43% of net revenues.
- Net earnings attributable to shareholders fell 6% to $430.8 million; diluted EPS was $2.36 versus $2.40, with operating income down 7% to $670 million.
- Shareholder returns remained strong: dividends per share increased 11% to $0.80 and $338 million was spent on buybacks, reducing diluted weighted shares by about 4% to 182.7 million.
- The balance sheet is conservative, with $974 million in cash and equivalents, no long-term debt, and $529 million in operating cash flow.
- Airfreight net revenue fell 7% to $701 million on a 12% decline in net revenue per kilo, while ocean freight net revenue fell 1% to $539 million, supported by order management growth of 11%.
- Notable events include a $6 million FX gain from the Egyptian pound devaluation in Q4 2016, the August 2016 bankruptcy of a large ocean carrier, and the appointment of a new Chief Strategy Officer effective February 28, 2017.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $6.10B$6.62B | −7.8% |
| Operating Expenses | $5.43B$5.90B | −7.9% |
| Operating Income | $670.16M$721.48M | −7.1% |
| Net Income | $430.81M$457.22M | −5.8% |
| EPS (Basic) | $2.38$2.42 | −1.7% |
| EPS (Diluted) | $2.36$2.40 | −1.7% |
| Shares Outstanding (Basic) | 181.28M188.94M | −4.1% |
| Shares Outstanding (Diluted) | 182.70M190.22M | −4.0% |
05—Questions
Frequently Asked Questions
Why did revenue fall while net revenue held up?
Expeditors is a non-asset based forwarder that buys cargo space from carriers and resells it. When carrier buy rates fell because of excess capacity, sell rates fell too, so gross revenue (which includes carrier charges) dropped about 8%. Net revenue, which excludes those pass-through carrier costs, is the better measure of the business and was down only about 1%.
Is the dividend and buyback program sustainable?
Based on the filing, yes, in the near term. Operating cash flow of $529 million and $974 million in cash covered the roughly $483 million returned in 2016, and the company carries no long-term debt. The dividend was raised to $0.80 per share, and the company has authorization remaining under its discretionary repurchase plan. Continued payouts at this level depend on earnings holding up, since profit fell in 2016.
What are the main risks to margins going forward?
Management cites carrier overcapacity, volatile fuel and bunker surcharges, and carrier financial instability, including the 2016 bankruptcy of a large ocean carrier. Rate increases from carriers can be implemented quickly and may not be passed on to customers, which compresses margins. Customers are also increasingly soliciting bids and pushing for better terms, which pressures pricing.
What should investors expect for accounting and cash flow changes in 2017?
Adoption of the stock compensation ASU from January 1, 2017 will move excess tax benefits and deficiencies into income tax expense, which will make the effective tax rate and diluted EPS more volatile. The company estimates this would have added $2.7 million of tax expense in 2016. Capital expenditures are expected to rise to about $110 million in 2017, including a European building. The company also expects to sell its Miami property, carried at $80 million, during 2017.
How concentrated is the business?
The business is diversified. No single customer accounts for 5% or more of net revenues. Operations span 177 district offices across five geographic areas, with North Asia the largest export-oriented region at 37% of revenues but only 22% of net revenues. China, including Hong Kong, is the only non-U.S. country above 10% of revenue, net revenue, assets, or equity in the periods presented, at 31% of total revenue in 2016.
06—Continue