EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
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 56 countries.

Key Financial Metrics

Note: Net revenues are considered a better measure of performance than total revenues as they exclude the pass-through costs of carrier charges.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 27.6% for the three months and 25.7% for the six months ended June 30, 2004, compared to the same periods in 2003. Net revenues increased 24.6% (QTD) and 21.9% (YTD).
• Profitability: Operating income rose 41% (QTD) and 35.8% (YTD). Net earnings increased 34.7% (QTD) and 31% (YTD).
• Volume vs. Yield: Airfreight tonnage increased 28% (QTD) and 26% (YTD). Ocean freight volumes (FEUs) increased 30% for both periods. However, ocean freight yields declined by 203 and 225 basis points respectively, as the Company chose not to fully pass on carrier rate increases to maintain market share.
• Expense Management: Salaries and related costs increased 20% (QTD) but decreased as a percentage of net revenues (53% vs 55% prior year). Other operating expenses increased 18% (QTD), partially due to a $2 million impairment loss on an equity investment in a technology company.
• Liquidity: Cash and cash equivalents increased by $76.6 million over the six-month period. The Company had no short-term debt outstanding at June 30, 2004.

Outlook, Risks, and Unusual Items

• Unusual Items: A $2 million impairment loss was recorded in Q2 2004 regarding an equity investment in a privately held technology company. Additionally, rental income from a San Francisco property ceased at the end of Q1 2004 due to scheduled remodeling.
• Capital Expenditures: The Company expects to spend approximately $60 million on capital expenditures in 2004, primarily for technology, leasehold improvements, and real estate (including a recent $17.8 million escrow payment for a facility in Hawthorne, CA).
• Dividends: A semi-annual cash dividend of $0.11 per share was declared and paid in June 2004.
• Risk Factors:
  • Currency Risk: The Company is exposed to foreign exchange fluctuations. A 10% weakening of the U.S. Dollar would have increased operating income by approximately $8.7 million for the six-month period.
  • Seasonality: Operations are seasonal, with Q1 traditionally being the weakest and Q3/Q4 the strongest.
  • Regulatory/Security: Business is subject to changes in trade restrictions, tariffs, and security regulations (e.g., post-9/11 security measures).
• Guidance: The filing does not provide specific numerical guidance for future periods. Management emphasizes organic growth and maintaining a global culture of superior service.

Investor Verification Checklist

• Impairment Charge: Verify the nature and recoverability of the $2 million impairment loss on the technology equity investment.
• Ocean Freight Yields: Monitor the trend of declining ocean freight yields (down 200+ basis points) and its impact on future margins despite volume growth.
• Accounts Receivable: Review the increase in accounts receivable ($526M vs $452M prior year-end) and the management's note regarding slower collections on large accounts.
• Capital Expenditure Plan: Confirm the execution of the projected $60 million capital expenditure plan for 2004 and its impact on cash flow.
• Foreign Currency Exposure: Assess the impact of currency fluctuations on future earnings, given the sensitivity analysis showing an $8.7M swing on a 10% USD move.