01—Abstract
Summary
Summary of the 10-K filed February 21, 2020. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported 2019 total revenues of $8.18 billiona, up 0.5% from $8.14 billion in 2018, while operating income fell 4% to $767 million from $797 million.
Net earnings attributable to shareholders declined 4.5% to $590 millionb, and diluted EPS was $3.39 versus $3.48. The decline was driven by a 10% drop in airfreight revenue and a 2% drop in ocean freight revenue, partly offset by a 16% increase in customs brokerage and other services revenue. Management attributed the softness to slowing global economic growth and ongoing U.S.-China trade disputes, and noted that the fourth quarter was hit hard by weaker China trade volumes.
Note that the revenue increase in customs brokerage partly reflects presentation changes (net-to-gross) that did not affect operating income. The balance sheet remains very strong, with $1.23 billionc in cash and equivalents, no long-term debt, and shareholders' equity of $2.20 billion. Operating cash flow improved to $772 million from $573 million, helped by lower receivables.
The company returned substantial capital to shareholders, paying $171 milliond in dividends ($1.00 per share, up from $0.90) and repurchasing $389 million of stock (5.3 million shares), down from $648 million in 2018. The primary forward-looking concern is COVID-19, which the filing says is disrupting central China operations, reducing airfreight capacity, and likely reducing 2020 shipment volumes.
Because China accounts for roughly 26% of revenue and 27% of operating income, management expects 2020 results to be negatively affected. Investors should weigh the company's cash-rich, asset-light model and history of profitability against near-term cyclical pressure, pricing volatility in airfreight and ocean markets, and the uncertainty created by trade policy and the epidemic.
02—Key points
Key Highlights
- Total revenues rose 0.5% to $8.18 billion, but operating income declined 4% to $767 million, and operating margin compressed to about 9.4% from 9.8%.
- Net earnings attributable to shareholders fell about 4.5% to $590 million; diluted EPS was $3.39, down from $3.48.
- Airfreight revenue fell 10% to $2.93 billion on a 9% decline in sell rates and a 6% decline in tonnage, reflecting softer demand and trade disputes.
- Customs brokerage and other services revenue grew 16% to $3.03 billion, becoming the largest revenue segment, though partly due to changes in revenue presentation that did not affect operating income.
- Balance sheet is very strong: $1.23 billion in cash, no long-term debt, and $2.20 billion in shareholders' equity; operating cash flow rose to $772 million.
- Capital return continued with dividends of $1.00 per share (up 11%) totaling $171 million, plus $389 million in share repurchases (5.3 million shares).
- COVID-19 is expected to reduce China trade and shipment volumes in 2020; China represents about 26% of revenues and 27% of operating income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 21, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $7.94B$8.14B | −2.4% |
| Operating Expenses | $7.18B$7.34B | −2.3% |
| Operating Income | $766.69M$796.56M | −3.7% |
| Net Income | $590.39M$618.20M | −4.5% |
| EPS (Basic) | $3.45$3.55 | −2.8% |
| EPS (Diluted) | $3.39$3.48 | −2.6% |
| Shares Outstanding (Basic) | 170.90M174.13M | −1.9% |
| Shares Outstanding (Diluted) | 174.21M177.83M | −2.0% |
05—Questions
Frequently Asked Questions
Why did Expeditors' operating income decline in 2019 even though revenue grew?
Total revenue increased only 0.5%, and the mix shifted. Airfreight revenue fell 10% on lower sell rates and tonnage, and ocean freight fell 2%. Customs brokerage grew 16%, but its gross-margin profile is lower, and overhead expenses rose 3% to $1.87 billion. Operating income fell 4% to $767 million as a result.
How significant is the COVID-19 outbreak to Expeditors' outlook?
Management said COVID-19 is expected to affect China trade and therefore its operations. Central China offices closed or operated with limited capacity, shipments were delayed or rerouted, and airfreight capacity could shrink. Because China (including Hong Kong) produced about 26% of 2019 revenue and 27% of operating income, the company expects a negative effect on 2020 results if disruption persists. The filing does not quantify the impact.
Is Expeditors' balance sheet and dividend safe?
The balance sheet is strong. The company had $1.23 billion in cash and equivalents, no long-term debt, and total assets of $3.69 billion. Operating cash flow of $772 million comfortably covered the $171 million in dividends. Management believes current cash and operating cash flow are sufficient for at least the next 12 months. Most of the company's cash ($457 million) sits in non-U.S. subsidiaries, which may be subject to foreign exchange controls.
What are the main risks to Expeditors' business model?
The company is a non-asset-based forwarder, so it depends on third-party carriers. Risks include carrier financial instability, capacity constraints, and rate volatility, especially as ocean carriers face higher costs from 2020 low-sulfur fuel rules. Other risks include U.S.-China trade policy and tariffs, currency exposure (a 10% dollar move could shift operating income by roughly $41–51 million), cybersecurity, and increasing regulation. Management also reported no material legal proceedings.
How much capital has Expeditors returned to shareholders, and how has that changed?
In 2019 the company paid $171 million in dividends and repurchased $389 million of stock, a total of about $560 million. This is lower than 2018's roughly $805 million, mainly because of reduced buybacks. The dividend increased to $1.00 per share from $0.90, and the company had about 9.6 million shares remaining under its repurchase authorization at year-end.
06—Continue