EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: The Company provides global logistics management, including international freight forwarding (air and ocean), customs brokerage, and import services. 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 Revenue is considered a key performance indicator by management as it excludes the pass-through costs of carrier charges.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 23.5% year-over-year. Net revenues grew 19.1%.
• Segment Performance:
  • Airfreight: Net revenues increased 19% driven by higher tonnage.
  • Ocean Freight: Volumes (FEUs) increased 30%, but net revenues grew only 9% due to a 248 basis point decline in yields. The Company chose not to pass on full carrier rate increases to maintain market share.
  • Customs Brokerage: Net revenues increased 26% due to growing reputation and consolidation in the market.
• Expenses: Salaries and related costs rose 19%, consistent with revenue growth. Other operating expenses increased 9% but decreased as a percentage of net revenues (21% vs 23%), reflecting cost containment.
• Liquidity: Cash and cash equivalents increased by $68.5 million. The Company repaid all short-term debt outstanding at the beginning of the period.

Outlook, Risks, and Management Commentary

• Capital Expenditures: CapEx for Q1 2004 was $8.6 million (vs $4.5 million in Q1 2003), primarily for technology and office equipment. Management expects to spend approximately $50 million on normal capital expenditures in 2004, financed with cash.
• Seasonality: The first quarter is traditionally the weakest seasonally. However, rapid business acceleration in March 2004 caused accounts receivable to increase, deviating from the typical Q1 cash flow pattern where collections exceed billings.
• Taxation: In Q4 2003, the Company recorded a $9.5 million tax expense to provide full U.S. taxation on $41.9 million of foreign earnings accumulated through 1992. This was done to allow global capital deployment without future repatriation tax concerns.
• Risk Factors:
  • Currency: The Company is exposed to foreign exchange risk. A 10% weakening of the U.S. Dollar would have increased operating income by approximately $4.4 million in Q1 2004. The Company does not use significant derivatives, relying instead on accelerating intercompany settlements.
  • Competition: The industry is consolidating; the Company competes on service quality and global network capabilities.
  • Regulatory: Changes in customs regulations, security policies, and trade restrictions could impact operations.
• Stock Repurchases: The Company repurchased 41,206 shares in Q1 2004 under its discretionary and non-discretionary plans.

Investor Verification Checklist

• Yield Trends: Verify the sustainability of ocean freight yields given the 248 basis point decline despite volume growth.
• Cash Flow Timing: Monitor accounts receivable days sales outstanding (DSO) given the deviation from historical Q1 collection patterns.
• Capital Allocation: Track the $50 million projected capital expenditure plan for 2004 against actual cash burn.
• Foreign Earnings: Confirm the impact of the Q4 2003 tax provision on future effective tax rates and repatriation strategies.
• Segment Mix: Assess the shift in revenue mix toward lower-margin North America-to-Far East ocean routes versus higher-margin routes.