Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: The Company is a global logistics provider offering air and ocean freight forwarding, customs brokerage, and value-added services. It operates as a non-asset-based carrier, meaning it does not own aircraft or vessels. The Company operates in 61 countries with a network of full-service offices, satellite offices, and independent agents.
Key Financial Metrics
| Metric | 2007 | 2006 | Change |
|---|---|---|---|
| Total Revenues | $5,235,171,000 | $4,633,987,000 | +13.0% |
| Net Revenues (Revenues less freight consolidation) | $1,452,961,000 | $1,290,960,000 | +12.5% |
| Operating Income | $423,400,000 | $375,116,000 | +12.9% |
| Net Earnings | $269,154,000 | $235,094,000 | +14.5% |
| Diluted EPS | $1.21 | $1.06 | +14.2% |
| Operating Margin (Operating Income / Net Revenues) | 29.1% | 29.1% | 0.0% |
| Net Cash from Operating Activities | $312,585,000 | $333,287,000 | -6.2% |
| Capital Expenditures | $82,786,000 | $139,464,000 | -40.6% |
| Working Capital | $764,944,000 | $632,691,000 | +20.9% |
| Cash and Short-term Investments | $575,273,000 | $511,936,000 | +12.4% |
| Long-term Debt | $0 | $0 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13% and net revenues increased 12.5% compared to 2006. This was driven by volume increases across all service lines.
- Airfreight: Net revenues increased 12% due to an 8% increase in global airfreight tonnages and a 4% expansion in yields (83 basis points).
- Ocean Freight: Net revenues increased 7% despite a 15% volume increase. Yields decreased by 8% (173 basis points) due to direct carrier cost increases that could not be fully passed to customers in a timely manner.
- Customs Brokerage: Net revenues increased 16%, attributed to market consolidation and increased demand for sophisticated computerized capabilities and regulatory compliance services.
- Expenses: Salaries and related costs increased 13% due to hiring and compensation levels. Other overhead expenses increased 11% but decreased as a percentage of net revenue.
- Cash Flow: Net cash provided by operating activities decreased by $20 million, primarily due to an increase in accounts receivable outpacing accounts payable.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: Total capital expenditures for 2008 are estimated to exceed $85 million, including real estate acquisitions and technology investments.
- Legal Contingencies (Antitrust):
- DOJ Investigation: On October 10, 2007, the U.S. Department of Justice issued a subpoena regarding alleged anti-competitive behavior among air cargo freight forwarders. As of December 31, 2007, the Company incurred approximately $3.7 million in legal costs. Additional costs, fines, or penalties are possible.
- Class Action Lawsuit: On January 3, 2008, the Company was named as a defendant in a federal antitrust class action lawsuit filed in New York. The Company intends to vigorously defend itself.
- Risk Factors:
- International Trade: Results are influenced by global economic conditions, currency fluctuations, and government policies.
- Third-Party Vendors: As a non-asset-based carrier, the Company relies on airlines and steamship lines; changes in their pricing or capacity affect profitability.
- Seasonality: Historically, Q1 is the weakest quarter, while Q3 and Q4 are the strongest.
- Regulatory Environment: Increasing security regulations (e.g., C-TPAT) may require further investment in technology and screening procedures.
- Management Commentary: Management emphasizes organic growth, a consistent global culture, and the retention of key personnel. The Company maintains a strong balance sheet with no long-term debt and significant cash reserves.
Investor Verification Checklist
- Antitrust Exposure: Monitor the status of the DOJ investigation and the January 2008 class action lawsuit for potential fines or penalties that could impact future earnings.
- Ocean Freight Yields: Verify if the Company can successfully pass on carrier cost increases to customers to stabilize ocean freight yields, which declined 8% in 2007.
- Accounts Receivable: Review the trend in accounts receivable, which grew significantly in 2007 and contributed to a decrease in operating cash flow.
- Capital Allocation: Confirm the execution of the 2008 capital expenditure plan ($85 million) and its impact on liquidity.
- Stock Repurchases: Track the Company's discretionary and non-discretionary stock repurchase programs, which were active in 2007 to offset share dilution from option exercises.