01—Abstract
Summary
Summary of the 10-K filed March 1, 2023. Cited figures are marked; the original filing is the authoritative source.
Expeditors International of Washington (EXPD) reported a 2022 that was strong in absolute terms but softened as the pandemic-era freight boom unwound.
Total revenues rose 3% to $17.07 billiona, while operating income fell 4% to $1.82 billion and net earnings attributable to shareholders declined 4% to $1.36 billion, or $8.26 per diluted share. The revenue gain was driven by higher buy and sell rates early in the year; volumes fell in most services as customer demand softened and the global economy slowed. Rates declined progressively through the second half, sharply in Q4, and management expects further declines in 2023, which could reduce revenues, expenses and operating income.
Cash generation and capital return were the standout features. Operating cash flow was $2.13 billionb, up from $868 million, largely from collecting receivables that had built up during the 2021 rate surge. The company returned about $1.8 billion to shareholders through repurchases (14.5 million shares at an average of $108.88) and dividends ($1.34 per share, up from $1.16).
Year-end cash was $2.03 billionc and the company carries no long-term debt, leaving a strong balance sheet. Investors should weigh two operational issues. A February 2022 cyber-attack shut down most global systems for about three weeks and cost roughly $65 million net, including demurrage and remediation.
More significantly, management disclosed a material weakness in internal control over financial reporting tied to unauthorized-capable database changes in an IT system. KPMG issued an adverse opinion on internal control, though it gave an unqualified opinion on the financial statements. Remediation is expected by the end of 2023.
02—Key points
Key Highlights
- Revenue rose 3% to $17.07B, but operating income fell 4% to $1.82B and diluted EPS fell to $8.26 from $8.27 as operating expenses grew faster.
- Operating cash flow more than doubled to $2.13B, driven by a $1.6B reduction in accounts receivable after the 2021 freight-rate peak; the company ended 2022 with $2.03B in cash and no long-term debt.
- Shareholder returns totaled about $1.8B in 2022: $1.58B in buybacks (14.5M shares) and $214M in dividends ($1.34/share, up 16%); a February 2023 authorization lowered the repurchase floor to 140M shares.
- Revenue mix: airfreight fell 13% to $5.89B, ocean freight rose 18% to $6.54B, and customs brokerage rose 10% to $4.64B; ocean freight consolidation volumes fell 10% while rates rose sharply.
- Management expects buy and sell rates to keep declining in 2023 as capacity exceeds demand, a headwind to revenue, expenses and operating income.
- Material weakness: ineffective IT general controls over database changes led to an adverse KPMG opinion on internal control over financial reporting as of December 31, 2022; remediation is targeted for end-2023.
- Cyber-attack costs: about $65M net in 2022 (including roughly $47M in demurrage and $18M in remediation and claims), with management stating no further material impact is expected.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2022filed March 1, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $17.07B$16.52B | +3.3% |
| Operating Expenses | $15.25B$14.61B | +4.3% |
| Operating Income | $1.82B$1.91B | −4.4% |
| Interest Expense | $23.28M$411K | +5563.5% |
| Net Income | $1.36B$1.42B | −4.1% |
| EPS (Basic) | $8.33$8.37 | −0.5% |
| EPS (Diluted) | $8.26$8.27 | −0.1% |
| Shares Outstanding (Basic) | 163.01M169.15M | −3.6% |
| Shares Outstanding (Diluted) | 164.43M171.25M | −4.0% |
05—Questions
Frequently Asked Questions
Why did earnings decline in 2022 despite revenue growth?
Revenue rose 3%, but operating expenses rose 4%. Customs brokerage and ocean expenses grew with the revenue, while overhead rose 4%, driven by cyber-attack costs ($18M), a $22M non-income tax contingency, higher rent, and other costs. Operating income fell 4% to $1.82B and net earnings attributable to shareholders fell 4% to $1.36B.
How much of the 2022 cash flow and capital return was sustainable?
Operating cash flow of $2.13B was boosted by collecting receivables built up during the 2021 rate spike, so it is unlikely to repeat at that level. Expeditors has no debt, $2.03B in cash, and capital expenditures of only $87M, with 2023 capex guided to $100M, so its capital return looks well supported. Management expects lower freight rates in 2023, which would mean lower revenue and earnings and likely lower cash generation.
Is the material weakness a serious concern for investors?
The weakness involves controls over database changes to IT systems supporting financial reporting. Management found no evidence of improper changes or misstatements, and KPMG's audit opinion on the financial statements was unqualified. However, the internal control opinion is adverse, and remediation is expected only by the end of 2023. Investors should monitor the remediation, since weaker controls can affect investor confidence and the stock price.
What is the outlook for 2023?
Management expects falling buy and sell rates as excess carrier capacity meets softer demand, along with continued pricing volatility from carriers and fuel costs. Lower volumes and rates could reduce revenue, expenses and operating income. Management has also noted rising labor, rent, and service-provider costs, and says it may not be able to pass inflation through to customers.
06—Continue