01—Abstract
Summary
Summary of the 10-K filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong 2017 for its FY ended December 31, 2017, with total revenues rising 14% to $6.92 billiona (from $6.10 billion) and net revenues (a non-GAAP measure) up 7% to $2.32 billion.
Net earnings attributable to shareholders increased 14% to $489.3 million, and diluted EPS rose to $2.69b from $2.36. Operating income grew 4.5% to $700.3 million, though the operating margin on net revenues slipped to 30% from 31%, as salaries and related costs rose to 55% of net revenues. Reported diluted EPS was helped by a net $39 million income tax benefit from the 2017 Tax Act, so the year's bottom-line growth partly reflects a one-time item rather than purely operating improvement.
The balance sheet remains very conservative, with $1.05 billionc in cash and cash equivalents, no long-term debt, and shareholders' equity of $1.99 billion. Operating cash flow was $489 million, down from $529 million, mainly because accounts receivable grew. Management returned capital through $478 million of share repurchases and $150 million of dividends ($0.84 per share, up from $0.80).
Expeditors also sold Miami property for about $84 milliond in proceeds. Looking forward, management flagged two accounting changes: the new revenue recognition standard (ASC 606), expected to reduce opening retained earnings by less than $35 million and to shift some revenue from net to gross presentation, and the new lease standard, which will bring about $260 million of future minimum lease payments onto the balance sheet.
Management also guided that the 2017 Tax Act should reduce the annual effective tax rate to roughly 31% to 34%. Key risks include ocean carrier financial instability and pricing volatility, airfreight capacity tightness, currency exposure, and the ongoing, multi-year transition to a new worldwide accounting system.
02—Key points
Key Highlights
- Total revenues grew 14% to $6.92 billion, while net revenues grew 7% to $2.32 billion, with airfreight net revenues up 7%, ocean freight up 5%, and customs brokerage up 9%.
- Diluted EPS rose 14% to $2.69, but Q4 2017 included a $39 million net tax benefit from the 2017 Tax Act, which flatters the reported earnings growth.
- Operating income increased 4.5% to $700 million, but operating margin on net revenues declined to 30% from 31% as salaries and related costs rose to 55% of net revenues.
- The company holds $1.05 billion in cash, has no long-term debt, and returned $628 million to shareholders through buybacks ($478 million) and dividends ($150 million).
- Dividends were raised to $0.84 per share in 2017 from $0.80, and the company repurchased 8 million shares during the year.
- Operating cash flow fell to $489 million from $529 million, driven by a $185 million increase in accounts receivable, highlighting working-capital sensitivity.
- Upcoming ASC 606 (revenue) and ASC 842 (leases) adoption will defer more revenue, change some net revenue reporting to gross, and add about $260 million of lease liabilities to the balance sheet.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 23, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $6.92B$6.10B | +13.5% |
| Operating Expenses | $6.22B$5.43B | +14.6% |
| Operating Income | $700.26M$670.16M | +4.5% |
| Net Income | $489.35M$430.81M | +13.6% |
| EPS (Basic) | $2.73$2.38 | +14.7% |
| EPS (Diluted) | $2.69$2.36 | +14.0% |
| Shares Outstanding (Basic) | 179.25M181.28M | −1.1% |
| Shares Outstanding (Diluted) | 181.67M182.70M | −0.6% |
05—Questions
Frequently Asked Questions
How did Expeditors perform financially in 2017?
Revenues rose 14% to $6.92 billion and net revenues rose 7% to $2.32 billion. Net earnings attributable to shareholders increased 14% to $489 million, and diluted EPS reached $2.69, up from $2.36 in 2016. Part of the earnings gain came from a one-time $39 million net tax benefit tied to U.S. tax reform.
Is Expeditors' balance sheet strong enough to support its capital returns?
Yes. At year-end 2017 the company had $1.05 billion in cash, no long-term debt, and $1.99 billion in shareholders' equity. It repurchased $478 million of stock and paid $150 million in dividends in 2017, funded from operating cash flow and existing cash.
What are the main risks to future profitability?
Key risks include carrier financial instability and pricing volatility, especially in ocean freight where excess capacity can cause sudden rate increases that Expeditors cannot always pass on to customers. Airfreight capacity tightness, currency exposure across many currencies, cybersecurity and system disruptions, and increasing regulatory and compliance burdens also pose risks.
What accounting changes could affect reported results going forward?
The new revenue standard, effective January 1, 2018, will defer more revenue into later periods and may shift some services from net to gross presentation, with an opening retained-earnings reduction of under $35 million. The new lease standard, effective in 2019, will put roughly $260 million of lease obligations on the balance sheet.
What does the 2017 Tax Act mean for Expeditors' tax rate?
Management estimates the Act will reduce the annual effective tax rate to between 31% and 34%. The 2017 effective rate was 31.8%, down from 37.0% in 2016. The company also faces a one-time mandatory repatriation tax of about $32 million, payable in installments over eight years.
06—Continue