Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company provides global logistics management, including 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 62 countries.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $1,564,913 | $4,326,489 |
| Net Revenues (Revenues less direct costs) | $429,127 | $1,200,780 |
| Operating Income | $135,396 | $353,931 |
| Net Earnings | $85,565 | $223,286 |
| Diluted EPS | $0.39 | $1.02 |
| Cash and Cash Equivalents (Sep 30, 2008) | $696,349 | N/A |
| Net Cash from Operating Activities | $91,678 | $306,386 |
| Long-Term Debt | $0 | $0 |
Margins (Nine Months 2008): Operating margin was 29% of net revenues; Net earnings margin was 19% of net revenues.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% for the three months and 14% for the nine months ended September 30, 2008, compared to 2007. Net revenues increased 12% (three months) and 12% (nine months).
- Profitability: Operating income rose 13% (three months) and 12% (nine months). Net earnings increased 15% (three months) and 12% (nine months).
- Segment Performance:
- Airfreight: Net revenues increased 8% (three months) and 9% (nine months), driven by higher net revenue per kilo despite volume declines in Asia.
- Ocean Freight: Net revenues increased 17% (three months) and 15% (nine months), driven by higher revenue per container.
- Customs Brokerage: Net revenues increased 11% (three months) and 12% (nine months).
- Cash Flow: Net cash provided by operating activities increased significantly to $92 million (three months) and $306 million (nine months), attributed to improved working capital management and smaller increases in accounts receivable compared to the prior year.
- Capital Expenditures: Decreased to $25 million (three months) and $49 million (nine months) compared to $40 million and $71 million in 2007, respectively.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: Total capital expenditures for 2008 are estimated not to exceed $65 million, funded by cash on hand.
- Legal Proceedings (Material Risk):
- DOJ Investigation: The U.S. Department of Justice is investigating alleged anti-competitive behavior among air cargo freight forwarders. As of September 30, 2008, the Company has incurred approximately $13 million in cumulative legal costs. Potential fines or penalties could materially impact financial condition.
- Antitrust Lawsuit: Named as a defendant in a federal class action lawsuit alleging anti-competitive practices. The Company intends to vigorously defend itself.
- European Commission: The EC issued a request for information regarding an ongoing investigation of freight forwarders.
- Employment Lawsuit: A former employee filed a putative class action regarding overtime and meal/rest break misclassification.
- Market Risks:
- Foreign Exchange: A 10% weakening of the U.S. dollar would have increased operating income by approximately $29 million for the nine-month period; a 10% strengthening would have reduced it by $23 million.
- Financial Markets: Management notes that global credit market disruptions could adversely affect customers' ability to pay, potentially leading to increased bad debts.
- Liquidity: The Company maintains $50 million in U.S. bank lines of credit and $20 million in international lines, with no amounts outstanding as of September 30, 2008. Working capital was $882 million.
Investor Verification Checklist
- Legal Exposure: Verify the status of the DOJ investigation and the potential magnitude of fines or penalties, as the Company states these could be material.
- Volume vs. Yield: Confirm the sustainability of revenue growth driven by higher "net revenue per kilo/container" rather than volume increases, particularly in the Asia region where volumes declined.
- Credit Quality: Monitor accounts receivable aging and bad debt provisions given the Company's exposure to global credit market disruptions and customer payment abilities.
- Capital Allocation: Review the execution of the $65 million capital expenditure plan and the continued repurchase of common stock (2.1 million shares repurchased in Q3 2008).
- Foreign Currency Impact: Assess the sensitivity of future earnings to U.S. dollar fluctuations, as the Company does not use significant hedging derivatives.