Expeditors International Of Washington - 2017 10-K Review

Summary

• Company provides a full suite global logistics services by acting as a third-party logistics provider.
• Revenue growth driven by customers focus on improving supply-chain efficiency, reducing overall logistics.
• Diluted EPS improved 14% largely due to improved financial performance.
• Exposure to growth regions including LATAM, Europe, and Asia.

Business Overview

Expeditors International of Washington, Inc. (NASDAQ:EXPD) provides a full suite of global logistics services, offering customers a seamless international network of people and integrated information systems to support the movement and strategic positioning of goods. As a third-party logistics provider, EXPD purchases cargo space from carriers (including airlines and ocean shipping lines) on a volume basis and resell that space to their customers.

The company provides a broad range of customer solutions, such as order management, time-definite transportation, warehousing and distribution, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other customized logistics solutions.

Expeditors' primary services include:

• Airfreight Services
• Ocean Freight and Ocean Services
• Customs Brokerage and Other Services

Airfreight Services

Airfreight services accounted for approximately 42%, 40%, and 41% of Expeditors' total revenues and 32%, 32%, and 34% of total net revenues in 2017, 2016, and 2015, respectively. When performing airfreight services, EXPD typically acts either as a freight consolidator or as an agent for the airline that carries the shipment. When acting as a freight consolidator, the company purchases cargo space from airlines on a volume basis and resell that space to its customers at lower rates than it could obtain directly from airlines on an individual shipment. Whether acting as a consolidator or agent, EXPD offers expertise for optimum routing, familiarity with local business practices, knowledge of export and import documentation and procedures, the ability to arrange for ancillary services, and assistance with space availability in periods of high demand.

Ocean Freight and Ocean Services

Ocean freight services accounted for approximately 30%, 32%, and 33% of Expeditors' total revenues and 24%, 25%, and 25% of total net revenues in 2017, 2016, and 2015, respectively. EXPD operates Expeditors International Ocean, Inc. (EIO), an ocean transportation intermediary, which specializes in ocean freight services in most major trade lanes in the world. EIO also provides service, on a smaller scale, to and from any location where EXPD has an office or an agent. Ocean freight services are comprised of three basic services: ocean freight consolidation, direct ocean forwarding, and order management.

Custom Brokerage and Other Services

Customs brokerage and other services accounted for approximately 28%, 28%, and 26% of Expeditors' total revenues and 44%, 43%, and 41% of total net revenues in 2017, 2016, and 2015, respectively. EXL assists in clearing shipments through customs by preparing and transmitting required information and documentation, calculating and providing for payment of duties and other taxes on behalf of the importer, arranging required inspections by governmental agencies, and providing delivery services. EXPD provides customs brokerage services in conjunction with transportation services or independently. Expeditors supports regulatory compliance and visibility to the supply chain through process and system controls, technology, and oversight by licensed and trained professionals.

Airfreight services was the largest service segment by total revenue in FY17. Note that net revenue is calculated as revenues less directly related operating expenses.

The U.S and North Asia are the largest geographic regions by total and net revenues.

Company Strategy

Overall, EXPD's growth strategy is to be selective, focus on markets and customers that promote growth and profitability, and leverage regional expertise. Additionally, to focus on aligning regions to promote efficiency and growth through leveraging its technology platform. EXPD is not opposed to acquisitions to accelerate growth; however, traditionally, growth has come organically and it will continue to be its focus.

Competition

No specific company is named as a competitor. EXPD notes that its business is highly-competitive and it differentiates itself by having the same technology systems throughout its network and offering superior customer service.

Executive Officers

Jeffrey S. Musser joined Expeditors in February 1983 and was promoted to District Manager in October 1989. Mr. Musser has held several leadership roles with the company and was appointed as President and Chief Executive Officer and was elected by the Board of Directors as a director, effective March 1, 2014.

Eugene K. Alger joined Expeditors in October 1981 and was promoted to District Manager in May 1982. Mr. Alger has held several leadership roles with EXPD. In August 2015, Mr. Alger was promoted to President, Global Services.

Daniel R. Wall joined Expeditors in March 1987. Mr. Wall has held several leadership roles with EXPD. In June 2015, Mr. Wall was appointed as President, Global Products.

Bradley S. Powell joined Expeditors as Chief Financial Officer in October 2008 and was elected Senior Vice President and Chief Financial Officer in February 2012. Prior to joining Expeditors, Mr. Powell served as President and Chief Financial Officer of Eden Bioscience Corporation, a publicly-traded biotechnology company, from December 2006 to September 2008.

Key Risks

Financial Highlights

Airfreight services revenues increased 17% in 2017 as compared with 2016 and are attributed to tonnage growth across all segments and higher average sell rates, principally on exports out of North Asia and Europe. Sell rates were increased in response to higher buy rates caused by an overall increase in market demand. Airfreight services expenses increased 21% in 2017 as compared with 2016, as a result of the 10% increase in tonnage and higher average buy rates due to tighter carrier capacity. Since late 2016, the global airfreight market has been experiencing imbalances between carrier capacity and demand in certain lanes, which is resulting in higher average buy rates.

Ocean freight and ocean services revenues increased 10% in 2017 as compared with 2016, primarily due to a 5% increase in container volume and higher average sell rates to customers. Ocean freight and ocean services expenses increased 12% in 2017 as compared with 2016, due to volume growth and higher average buy rates, resulting from overall market demand and carriers managing available capacity.

Customs brokerage and other services revenues and expenses increased 12% and 16%, respectively, in 2017 as compared with 2016, primarily as a result of higher volumes.

Salaries and related costs increased 9% in 2017 as compared with 2016, principally due to an increase in the number of employees, primarily in North America, South Asia and Europe, higher salaries, and an increase in bonuses resulting from higher operating income. Other overhead expenses increased 5% in 2017. The company continues to invest in additional technology and facilities, which resulted in higher rent and facilities expenses, technology-related fees, and consulting costs.

Contractual Obligations

The letters of credits were supported by international unsecured bank lines of credit.

EXPD enters into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. Historically, the company has met these obligations in the normal course of business. There are no material off balance sheet obligations.

Balance Sheet

Total assets increased between 2016 and 2017 and are largely due to the increase in the cash position and A/R.

Total liabilities increased yoy due to the increase in A/P and accrued expenses. The Company has no long-term debt.

Total equity improved from $1.8Bn at FYE16 to $2Bn at FYE17 due to an increase in retained earnings (supported by net income of $490MM) and a decrease in AOCI.

Revenue growth is due to higher volumes and improved pricing. Margins compressed slightly yoy; however, net income growth was supported by lower tax expense.

Diluted EPS improved 14% yoy due to a combination of an increase in net earnings and slightly lower share count ($478MM purchased in 2017).

Cash Flow

Operating CF decreased yoy due to deferred income tax benefit of $(44MM) in 2017 compared to $16MM in 2016, and an increase cash use related to A/R from $(102MM) to $(185MM), partially offset by increase in net earnings.

Investing activities were a cash use of $(12MM) in 2017 compared to $(53MM) in 2016. The improvement was due to proceeds from sale of property and equipment of $84MM (related to sale of land and buildings in Miami, FL).

Free cash flow as defined as operating CF less CapEx was strong at $394MM in 2017 compared to $470MM in 2016. The decrease is due to a combination of lower operating CF and higher CapEx yoy. Total anticipated capital expenditures in 2018 are currently estimated to be $75 million.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.