EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: The Company provides global logistics services, including international freight forwarding (air and ocean), customs brokerage, and value-added distribution. It operates as a non-asset-based carrier, meaning it does not own aircraft or steamships but purchases transportation services from direct carriers to resell to customers.

Key Financial Metrics

(Amounts in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.8% for the three months and 20.0% for the six months ended June 30, 2003, compared to the same periods in 2002. Net revenues increased 14.2% (QTD) and 15.0% (YTD).
• Profitability: Net earnings rose 17.8% for the quarter and 15.5% for the six-month period. Operating margins remained stable at approximately 23% of net revenues.
• Segment Performance:
  • Airfreight: Net revenues increased 9% (QTD) and 10% (YTD) due to effective vendor management.
  • Ocean Freight: Net revenues increased 20% (QTD) and 19% (YTD). However, yields declined slightly (2.7% QTD, 2.5% YTD) due to industry-wide carrier rate increases passed to customers in the second quarter.
  • Customs Brokerage: Net revenues increased 17% (QTD) and 18% (YTD), consistent with higher freight volumes.
• Expenses: Salaries and related costs increased 17% (QTD) and 16% (YTD) due to hiring and higher compensation levels, including redundancy payments for European restructuring. Other operating expenses decreased as a percentage of net revenue due to cost containment and lower bad debt expense.
• Cash Flow: Net cash provided by operating activities decreased $3.3 million for the quarter compared to 2002, primarily due to a $9.7 million increase in other current assets. For the six-month period, operating cash flow increased $17.1 million, driven by a decrease in accounts receivable and an increase in accounts payable.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company expects to spend approximately $30 million on normal capital expenditures in 2003, primarily for technology, leasehold improvements, and equipment. These are expected to be financed with cash.
• Liquidity: The Company maintains $50 million in U.S. bank lines of credit and $12.3 million in international lines. At June 30, 2003, only $0.5 million was drawn on these lines. Management believes current cash and operating flows are sufficient for foreseeable needs.
• Restructuring: The Company closed one branch (Luton, U.K.) and restructured another (Bristol, U.K.) in the second quarter to streamline European operations.
• Market Risks:
  • Foreign Exchange: A 10% weakening of the U.S. Dollar would have increased operating income by approximately $5.3 million for the six months ended June 30, 2003. The Company does not use derivatives to hedge but accelerates currency settlements.
  • Interest Rates: A hypothetical 10% change in interest rates would have no material impact on earnings.
• Seasonality: The first quarter is traditionally the weakest, while the third and fourth quarters are the strongest. Cash flow fluctuates with these seasonal patterns.

Investor Verification Checklist

• Net Revenue vs. Total Revenue: Verify the distinction between total revenue (which includes pass-through carrier costs) and net revenue (the actual yield), as the latter is the primary measure of profitability.
• Stock-Based Compensation: Note that reported earnings do not include stock-based compensation expense under SFAS No. 123. Pro forma net earnings for the six months ended June 30, 2003, would be $41.4 million (vs. reported $53.0 million).
• European Restructuring: Monitor the impact of recent branch closures and restructurings in the U.K. and Netherlands on future operating costs and efficiency.
• Foreign Currency Exposure: Assess the impact of currency fluctuations on operating income, given the Company's global operations and policy of not using derivative hedges.
• Capital Allocation: Confirm the Company's strategy of organic growth supplemented by selective acquisitions, and the funding of capital expenditures via operating cash flow rather than debt.