EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: The Company provides global logistics management, including 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 57 countries.

Key Financial Metrics

(Amounts in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% for the three months and 18% for the six months ended June 30, 2005, compared to the same periods in 2004. Net revenues grew 13% (quarterly) and 13% (year-to-date).
• Profitability: Operating income rose 17% quarterly and 18% year-to-date. Net earnings increased 19% quarterly and 19% year-to-date.
• Volume Drivers: Airfreight tonnage increased 6% for both periods. Ocean freight volumes (FEUs) increased 19% quarterly and 23% year-to-date, though yields faced modest pressure in the first half of the year.
• Expense Management: Salaries and related costs increased 14% (quarterly) and 13% (year-to-date), driven by hiring and compensation levels. Other operating expenses decreased as a percentage of net revenues due to cost containment and the absence of a $2 million impairment charge recorded in Q2 2004.
• Cash Flow: Net cash provided by operating activities increased to $47 million (quarterly) and $143 million (year-to-date), up from $33 million and $109 million in 2004, respectively.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company expects normal capital expenditures of approximately $30 million in 2005. However, total capital expenditures could exceed $100 million if the Company adopts a plan to meet investment requirements under IRC 965 (repatriation of foreign earnings).
• Accounting Changes: The Company must adopt SFAS No. 123R (Share-Based Payment) in Q1 2006. Management expects this to have a material impact on reported earnings and cash flows by requiring the expensing of stock-based compensation. Pro forma net earnings for the six months ended June 30, 2005, would have been $66.9 million under this standard.
• Tax Strategy: The Company is evaluating the impact of the American Jobs Creation Act of 2004 on repatriating foreign earnings. If a plan is adopted, the 2005 effective tax rate may be lower than prior years.
• Risk Factors:
  • Currency Risk: A 10% weakening of the U.S. Dollar would have increased operating income by approximately $14 million for the six-month period; a 10% strengthening would have reduced it by $11 million.
  • Seasonality: The first quarter is traditionally the weakest, while the third and fourth quarters are strongest.
  • Competition: The industry is consolidating; the Company relies on organic growth and strategic acquisitions rather than aggressive M&A.

Investor Verification Checklist

• Stock Repurchases: Verify the impact of the new policy to repurchase shares to offset dilution from stock option exercises ($50 million used in the first six months of 2005).
• Yield Trends: Monitor ocean freight yields, which declined slightly in Q1 2005 despite volume growth, potentially affecting future margins.
• IRC 965 Decision: Confirm whether the Company will repatriate foreign earnings, which could trigger significant capital expenditures and alter the tax rate for 2005.
• SFAS 123R Impact: Review the magnitude of the non-cash stock-based compensation expense expected to be recognized starting in 2006.
• Contingent Liabilities: Note the $61 million in standby letters of credit and guarantees related to foreign subsidiaries, though management states no additional expense is expected.