EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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, meaning it does not own aircraft or ships but consolidates shipments to negotiate favorable rates from direct carriers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14.6% for the three months and 11.8% for the nine months ended September 30, 2007, compared to the same periods in 2006. Net revenues grew 12.8% (quarter) and 12.4% (year-to-date).
• Profitability: Operating income rose 18.1% for the quarter and 14.6% year-to-date. Net earnings increased 16.5% for the quarter and 15.4% year-to-date.
• Segment Performance:
  • Airfreight: Net revenues increased 13% due to higher tonnage and yield expansion.
  • Ocean Freight: Volumes (FEUs) increased 14% (quarter) and 16% (YTD), but net revenues grew only 7% and 6% respectively due to yield compression from carrier cost increases that could not be fully passed to customers.
  • Customs Brokerage: Net revenues increased 16% driven by market consolidation and regulatory compliance demands.
• Cash Flow: Operating cash flow decreased $48 million for the quarter and $39 million year-to-date compared to 2006, primarily due to a significant increase in accounts receivable resulting from a spike in business volume in late August and September 2007.
• Capital Expenditures: Increased significantly to $40 million for the quarter (vs. $10 million in 2006) and $71 million year-to-date, driven by a $35 million real estate acquisition in Hong Kong and technology investments.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Total capital expenditures for 2007 are expected to exceed $80 million, funded by cash on hand.
• Seasonality: The Company notes historical seasonality with Q1 typically being the weakest and Q3/Q4 the strongest. Cash flow is cyclical, with receivables consuming cash during peak seasons.
• Legal Proceedings: On October 10, 2007, the U.S. Department of Justice issued a subpoena regarding an investigation into air cargo freight forwarders. The Company is cooperating and conducting a self-review.
• Market Risks:
  • Currency: A 10% weakening of the U.S. dollar would have increased operating income by approximately $26 million for the nine-month period; a 10% strengthening would have reduced it by $21 million.
  • Competition: The industry is consolidating; the Company competes on service quality and global network capabilities.
• Stock Repurchases: The Company repurchased 1.3 million shares in Q3 2007 under its discretionary and non-discretionary plans to offset dilution from stock option exercises.

Investor Verification Checklist

• Accounts Receivable: Verify the collection timeline for the $984 million in receivables, as the spike in late-Q3 volume has temporarily reduced operating cash flow.
• Ocean Freight Yields: Monitor the ability to pass through carrier cost increases to customers to prevent further margin compression in the ocean segment.
• DOJ Investigation: Track the outcome of the Department of Justice subpoena regarding air cargo freight forwarders for potential legal or reputational impact.
• Capital Allocation: Confirm the ROI on the $35 million Hong Kong real estate acquisition and the $80 million total 2007 capex budget.
• Foreign Currency Exposure: Assess the impact of a strengthening U.S. dollar on future operating income given the Company's global revenue mix.