01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a strong 2018 for its fiscal year ended December 31, 2018.
Total revenues rose 18% to $8.14 billiona from $6.92 billion, and net revenues (a non-GAAP measure) grew 13% to $2.62 billion. Net earnings attributable to shareholders increased 26% to $618.2 million, and diluted EPS rose to $3.48 from $2.69. Operating income grew 14% to $796.6 million, with the operating margin on net revenues holding at about 30%.
Much of the top-line growth reflects a $225 millionb gross-up from changing the presentation of certain warehouse and distribution revenues under the new revenue recognition standard (ASC 606), so investors should focus on net revenues and operating income for underlying performance. Growth was broad-based across the three principal services. Airfreight net revenues rose 15%, driven by a 15% increase in net revenue per kilo and 3% tonnage growth amid tighter carrier capacity.
Ocean freight net revenues rose 4%, held back by lower sell rates in ocean consolidation, offset by strong order management (+11%) and direct forwarding (+6%). Customs brokerage and other services net revenues rose 17% and now represent 45% of net revenues. The balance sheet remains very strong, with $924 millionc in cash, no long-term debt, and shareholders' equity of about $2.0 billion.
The company returned substantial capital through $648 milliond in buybacks and $157 million in dividends ($0.90 per share, up from $0.84). Key risks include carrier pricing volatility, ocean overcapacity, trade policy shifts (notably U.S.-China tariffs), currency exposure, and rising compensation costs tied to incentive pay.
Management also flagged a new ASC 842 lease standard, expected to add roughly $370 million of right-of-use assets and lease liabilities on January 1, 2019, and an ongoing worldwide accounting system implementation. The Company reported effective internal controls over financial reporting, with KPMG issuing an unqualified opinion.
02—Key points
Key Highlights
- Total revenues increased 18% to $8.14 billion, while net revenues grew 13% to $2.62 billion; roughly $225 million of the revenue increase reflects a gross-basis presentation change for warehousing and distribution.
- Net earnings attributable to shareholders rose 26% to $618.2 million; diluted EPS was $3.48 versus $2.69 in 2017, which benefited from a $39 million one-time tax benefit in 2017.
- Operating income increased 14% to $796.6 million, with the operating margin on net revenues steady at about 30%.
- Customs brokerage and other services is now the largest contributor to net revenues at 45% (net revenues up 17%), while airfreight net revenues rose 15% on higher net revenue per kilo.
- Effective tax rate fell to 24.3% from 31.8%, reflecting the 2017 Tax Act's lower U.S. federal rate and share-based compensation deductions.
- Strong liquidity: $924 million of cash and equivalents, no long-term debt, and operating cash flow of $573 million.
- Shareholder returns were significant: $648 million in share repurchases and $0.90 per share in dividends (up 7%), with the 2018 buyback program reducing shares outstanding to about 171.6 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $8.14B$6.92B | +17.6% |
| Operating Expenses | $7.34B$6.22B | +18.0% |
| Operating Income | $796.56M$700.26M | +13.8% |
| Net Income | $618.20M$489.35M | +26.3% |
| EPS (Basic) | $3.55$2.73 | +30.0% |
| EPS (Diluted) | $3.48$2.69 | +29.4% |
| Shares Outstanding (Basic) | 174.13M179.25M | −2.9% |
| Shares Outstanding (Diluted) | 177.83M181.67M | −2.1% |
05—Questions
Frequently Asked Questions
How much of the 2018 revenue growth reflects underlying business performance versus accounting changes?
Total revenues grew 18%, but net revenues, which strip out carrier costs and are the better measure of underlying performance, grew 13%. The company also changed the presentation of certain warehouse and distribution revenues from net to gross under ASC 606, which added about $225 million to both revenues and operating expenses. Because this gross-up carries little margin, it inflates total revenue growth without much effect on profit.
What are the main risks to Expeditors' margins going forward?
The company's risk factors center on pricing volatility from ocean carriers and airlines, which can raise buy rates faster than Expeditors can pass them to customers. Ocean carriers have structural overcapacity and are heavily indebted, and new marine fuel sulfur rules effective in 2020 may raise carrier costs. Tariff changes between the U.S. and China, along with Brexit negotiations, could also reduce trade volumes. Competitive pressure from customers seeking lower rates and more favorable contract terms, including longer payment terms, is another concern.
How is Expeditors returning capital to shareholders, and is it sustainable?
In 2018 the company repurchased about $648 million of stock and paid $157 million in dividends, funded by operating cash flow of $573 million and existing cash of $924 million. The dividend was raised to $0.45 per semi-annual payment, and the discretionary buyback authorization was lowered to 160 million shares outstanding. Given zero long-term debt and strong cash generation, the payouts appear sustainable, though buybacks are discretionary and could slow if business conditions weaken.
What upcoming accounting changes could affect the balance sheet?
On January 1, 2019, Expeditors adopts the new lease standard (ASC 842). The company expects to record a right-of-use asset and lease liability of roughly $370 million, mainly for office and warehouse space. This will grow reported total assets and liabilities without changing cash flow. The company is also rolling out a new worldwide accounting system over several years, which it notes requires ongoing internal control testing.
Is seasonality a concern for quarterly earnings and cash flow?
Yes. The first quarter is historically the weakest for both revenue and earnings, while the third and fourth quarters are the strongest. Cash flow also follows the cycle: receivables build during peak periods from late Q2 into Q4, which consumes cash, and the first quarter typically generates it through collections. Management notes that historical patterns are not guaranteed to continue, so investors should evaluate results on a trailing or annual basis.
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