EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 61 countries.

Key Financial Metrics

Note: Net revenues are considered a better measure of performance than total revenues as they exclude carrier costs passed through to customers.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.8% year-over-year. Net revenues increased 12.0%.
• Segment Performance:
  • Airfreight: Net revenues increased 9% (driven by an 8% increase in tonnage).
  • Ocean Freight: Net revenues increased 13% (driven by an 8% increase in container volumes and a 5% increase in net revenue per container).
  • Customs Brokerage: Net revenues increased 15% due to focused marketing and market consolidation.
• Expenses: Salaries and related costs increased 13% due to hiring and compensation levels. Other overhead expenses increased 11%, partly due to a $2 million increase in legal costs related to the DOJ investigation.
• Cash Flow: Operating cash flow increased significantly by $62.6 million, primarily due to timing of disbursements and a decrease in accounts receivable.
• Stock Repurchases: The Company repurchased 427,447 shares in Q1 2008 for approximately $18.6 million, compared to $72.4 million in Q1 2007.

Guidance, Outlook, Risks, and Contingencies

Outlook and Capital Expenditures

Management expects total capital expenditures for 2008 to be approximately $85 million, including $71 million for normal expenditures (technology, equipment, leasehold improvements) and additional real estate acquisitions. The Company anticipates seasonal fluctuations, with the first quarter traditionally being the weakest and the third/fourth quarters the strongest.

Legal Proceedings and Contingencies

• DOJ Investigation: The Company is cooperating with a U.S. Department of Justice investigation into alleged anti-competitive behavior among air cargo freight forwarders. As of March 31, 2008, the Company has incurred approximately $6.6 million in legal costs. Potential fines or penalties could have a material impact on financial condition.
• Class Action Lawsuit: On January 3, 2008, the Company was named as a defendant in a Federal antitrust class action lawsuit in New York alleging anti-competitive practices. The Company intends to vigorously defend itself.

Risk Factors

• Currency Risk: A 10% weakening of the U.S. dollar would increase operating income by approximately $8 million, while a 10% strengthening would decrease it by approximately $7 million. The Company does not use significant derivatives to hedge.
• Regulatory/Political: Business is subject to changes in tariffs, trade restrictions, and security regulations (e.g., post-9/11 security measures).

Investor Verification Checklist

• DOJ Investigation Status: Monitor updates on the Department of Justice investigation regarding air cargo freight forwarders and potential fines.
• Legal Costs: Track the trajectory of legal expenses related to the DOJ investigation and the New York class action lawsuit.
• Capital Expenditure Execution: Verify if the projected $85 million in 2008 capital expenditures aligns with actual spending, particularly regarding real estate acquisitions.
• Currency Exposure: Assess the impact of U.S. dollar fluctuations on operating income given the Company's global revenue mix and limited hedging strategy.
• Stock Repurchase Policy: Review the pace of share repurchases relative to stock option exercises to understand dilution management.