Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: The Company is a global logistics management provider specializing in international freight forwarding (air and ocean) and customs brokerage. It operates as a non-asset-based carrier, purchasing transportation services from direct carriers and reselling them to customers. Operations span 60 countries.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2007 |
6 Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $1,258,618 | $2,377,564 |
| Net Revenues (Revenues less transportation costs) | $354,574 | $688,710 |
| Operating Income | $101,738 | $196,263 |
| Net Earnings | $65,489 | $124,777 |
| Diluted EPS | $0.30 | $0.56 |
| Cash and Cash Equivalents (Balance Sheet) | $575,042 | $575,042 |
| Net Cash from Operating Activities | $86,932 | $203,011 |
| Working Capital | $674,493 | N/A |
| Long-term Debt | $0 | $0 |
Note: Net revenues are considered a better measure of performance than total revenues as they exclude carrier charges passed through to customers.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.2% for the quarter and 10.2% for the six-month period compared to 2006. Net revenues increased 12.3% (quarter) and 12.2% (six months).
- Profitability: Operating income rose 14.6% for the quarter and 12.7% for the six-month period. Net earnings increased 16.3% (quarter) and 14.8% (six months).
- Segment Performance:
- Airfreight: Net revenues increased 10% (quarter) and 13% (six months), driven by yield expansion and tonnage growth, particularly in Asia and the Middle East.
- Ocean Freight: Volumes (FEUs) increased 19% (quarter) and 16% (six months), but net revenues grew only 8% and 6% respectively due to declining yields caused by carrier cost increases that could not be fully passed on.
- Customs Brokerage: Net revenues increased 17% (quarter) and 16% (six months) due to market consolidation and regulatory compliance demands.
- Expenses: Salaries and related costs increased 14.5% (quarter) and 14.0% (six months), partly due to increased hiring and stock-based compensation. Stock compensation expense rose to $12.0 million (quarter) and $23.5 million (six months).
- Cash Flow: Operating cash flow improved significantly, increasing $31 million for the quarter and $9 million for the six-month period compared to 2006.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects total capital expenditures for 2007 to exceed $106 million. This includes approximately $43 million for routine expenditures and significant real estate acquisitions, including a $34 million office purchase in Hong Kong closed in July 2007.
- Liquidity: The Company maintains a strong cash position with $576 million in cash and short-term investments. It has no long-term debt and utilizes unsecured bank lines of credit ($50 million US, $17 million international, $14 million UK standby).
- Share Repurchases: The Company continues to repurchase shares to offset dilution from stock option exercises. In Q2 2007, 1.32 million shares were repurchased at an average price of $42.76.
- Dividends: A semi-annual cash dividend of $0.14 per share was declared and paid in June 2007.
- Risks:
- Currency: Significant exposure to foreign exchange rates. A 10% weakening of the USD would have increased operating income by ~$16 million, while a 10% strengthening would have reduced it by ~$13 million.
- Competition: Intense competition in the logistics industry, with a trend toward consolidation.
- Regulatory: Dependence on relationships with governmental agencies and carriers; changes in security regulations or tariffs could impact operations.
Investor Verification Checklist
- Yield Trends: Verify the sustainability of airfreight yield expansion versus the pressure on ocean freight yields due to carrier cost increases.
- Capital Allocation: Confirm the impact of the $106 million projected capital expenditure plan on future cash flows and debt levels.
- Stock-Based Compensation: Monitor the impact of increasing stock compensation expense on net margins and the assumptions used in the Black-Scholes model (volatility, expected life).
- Currency Exposure: Assess the Company's hedging strategy (or lack thereof) given the significant sensitivity of operating income to USD fluctuations.
- Real Estate Acquisitions: Review the integration and ROI of the new Hong Kong facility and other real estate developments included in the 2007 capex budget.