Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company is a global logistics management provider specializing in international freight forwarding (air and ocean), customs brokerage, and value-added distribution services. It operates as a non-asset-based carrier, purchasing transportation services from direct carriers and reselling them to customers. Operations span 61 countries.
Key Financial Metrics
| Metric (in thousands) | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Total Revenues | $1,454,255 | $1,258,618 | $2,761,576 | $2,377,564 |
| Net Revenues (Revenues less transportation costs) | $397,325 | $354,574 | $771,653 | $688,710 |
| Operating Income | $112,971 | $101,738 | $218,535 | $196,263 |
| Net Earnings | $71,249 | $65,489 | $137,721 | $124,777 |
| Diluted EPS | $0.32 | $0.30 | $0.62 | $0.56 |
| Cash and Cash Equivalents (End of Period) | $703,488 | $575,042 | $703,488 | $575,042 |
| Working Capital | $875,785 | N/A | N/A | N/A |
| Long-Term Debt | $0 | $0 | $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 15.6% in Q2 2008 and 16.2% YTD 2008 compared to the prior year. Net revenues increased 12.1% in Q2 and 12.0% YTD.
- Segment Performance:
- Airfreight: Net revenues rose 11% in Q2 and 10% YTD, driven by tonnage increases in North America (+13%) and Europe (+16%) and improved yield per kilo.
- Ocean Freight: Net revenues increased 13% in both Q2 and YTD, supported by volume growth (3-5% in FEUs) and higher net revenue per container (6-7%).
- Customs Brokerage: Net revenues grew 12% in Q2 and 13% YTD due to focused marketing and regulatory compliance demands.
- Expenses: Salaries and related costs increased 9% in Q2 and 11% YTD due to hiring and compensation increases. However, as a percentage of net revenue, salaries decreased from 55.7% to 54.2% (Q2) due to productivity gains and lower stock compensation expense ratios.
- Legal Costs: The Company incurred approximately $5 million in legal expenses in Q2 and $7 million YTD 2008 related to the DOJ investigation into air cargo freight forwarders.
- Cash Flow: Net cash provided by operating activities decreased $51 million in Q2 2008 compared to Q2 2007, primarily due to timing of receipts/disbursements and a $25 million decrease in income taxes payable (due to regulatory changes in estimated tax payments).
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditures: The Company expects total capital expenditures for 2008 to be approximately $85 million, including $71 million for normal operations and additional real estate acquisitions. These are expected to be financed with cash.
- Dividends: A semi-annual cash dividend of $0.16 per share was declared and paid in June 2008.
- 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 June 30, 2008, cumulative legal costs were approximately $11 million. Potential fines or penalties could have a material impact on financial condition.
- European Commission: The EC issued a request for information to the Company's UK subsidiary regarding an ongoing investigation of freight forwarders.
- Class Action Lawsuits: The Company is a defendant in a federal antitrust class action lawsuit (Precision Associates, Inc. et al v. Panalpina World Transport) and a putative class action regarding employee overtime classification (Kingery v. Expeditors). Management intends to vigorously defend these claims.
- Market Risks: The Company is exposed to foreign exchange risk. A 10% weakening of the U.S. dollar would have increased operating income by approximately $18 million for the six months ended June 30, 2008. The Company does not use derivative financial instruments to manage this risk significantly.
Investor Verification Checklist
- Legal Exposure: Verify the status of the DOJ and EC investigations and the potential magnitude of fines or penalties, which are currently unquantified but deemed potentially material.
- Cash Flow Volatility: Monitor the impact of seasonal fluctuations and changes in tax payment regulations on operating cash flow, which saw a significant decline in Q2 2008.
- Capital Allocation: Confirm the execution of the $85 million capital expenditure plan and the continued use of cash reserves for stock repurchases (1.1 million shares repurchased in Q2 2008).
- Yield Trends: Track net revenue per kilo (air) and per container (ocean) to ensure pricing power is maintained against rising operational costs.
- Foreign Exchange: Assess the impact of currency fluctuations on earnings, given the Company's significant international operations and lack of hedging derivatives.